Insurance Fundamentals

Risk

Uncertainty about whether a loss will occur.

Pure risk

A situation with only the possibility of loss or no loss, not financial gain

Speculative risk

A situation involving the possibility of loss, gain, or neither.

Peril

The direct cause of a loss

Ex: fire, theft, or collision

Hazard

A condition that increases the likelihood or severity of a loss

Physical Hazard

A tangible condition that increases risk

Ex: Faulty wiring

Moral Hazard

Dishonesty or intentional behavior that increases the chance of a loss

Morale Hazard

Carelessness or indifference toward loss because insurance exists

Exposure

A person, property, or activity subject to possible loss.

Indemnity

Restoring an insured financially to approximately their pre-loss position, subject to policy terms

Insurable interest

A financial or other legally recognized interest in avoiding a loss

Proximate Cause

The legally significant cause that sets a chain of events in motion, producing a loss.

Deductible

The amount of a covered loss the insured must pay before insurance contributes

Premium

The amount paid for insurance coverage

Policy Limit

The maximum amount an insurer will pay, subject to the policy’s terms

Actual Cash Value (ACV)

Replacement cost minus depreciation, under the common insurance valuation method.

Replacement Cost Value

Cost to replace damaged property with comparable property without deducting depreciation, subject to policy terms

Depreciation

Reduction in property value due to age, wear, condition, or obsolescence

Subrogation

An insurer’s right to pursue recovery from a responsible third party after paying a covered claim

Salvage

Damaged property that retains value after a loss.

Negligence

Failure to exercise reasonable care, resulting in harm to another

Liability

Legal responsibility for injury, damage, or another obligation

Occurrence

An event, including continuous or repeated exposure in some policies, that results in covered injury or damage.

Exclusion

A policy provision removing coverage for specified causes, property, circumstances, or losses.

Endorsements

A document that modifies an insurance policy’s terms or coverage.