Insurance Fundamentals and Legal Concepts

Vocabulary practice flashcards covering fundamental insurance concepts, risk management techniques, insurable risks, contract elements, agency authority, and contract law interpretations.

Risk

The possibility of loss, or what could go wrong.

Exposure

Being in a situation or position where you are subject to potential loss.

Hazard

Anything that increases the chance or likelihood of a loss occurring.

Moral Hazard

Hazard arising from dishonesty or intentional wrongdoing, such as lying on an insurance claim.

Morale Hazard

Hazard arising from carelessness, attitude, or irresponsibility, such as leaving doors unlocked because you are insured.

Physical Hazard

A physical condition that increases the probability of a loss, such as worn tires or faulty wiring.

Peril

The specific event or cause that actually produces the damage, loss, or harm.

Loss

The actual damage, injury, or expense that has occurred.

Named Peril Policy

An insurance policy that covers only the specific causes of loss that are explicitly listed in the contract.

Open Peril Policy

An insurance policy that covers damage from all causes except those specifically excluded in the text.

Pure Risk

A risk situation involving only the chance of loss or no loss, which is generally insurable.

Speculative Risk

A risk situation involving the chance of gain or loss (such as gambling), which is generally not insurable.

Avoidance

A risk handling technique that completely eliminates the situation that could cause a loss.

Retention

A risk handling technique where an individual or entity accepts and pays for the financial impact of a loss themselves.

Sharing

A risk handling technique where a group agrees to distribute the financial burden of losses among all members.

Reduction

A risk handling technique focused on lowering the likelihood or severity of a loss, such as installing safety devices.

Transfer

A risk handling technique that shifts the financial responsibility of a potential loss to another party, such as an insurance company.

Law of Large Numbers

The principle that as the number of similar exposure units increases, the insurer's ability to accurately predict the number of future claims improves.

Consideration

An essential element of a contract where value is exchanged, such as an applicant's premium and application given for the insurer's promise to pay covered claims.

Competent Parties

An element of a contract requiring all participating parties to be legally capable of entering into an agreement (e.g., alive, sane, authorized).

Legal Purpose

A requirement that an insurance contract must be formed for lawful reasons and comply with public policy.

Express Authority

Authority explicitly and directly granted to an agent by the principal in written or spoken words.

Implied Authority

Authority that is not specifically stated in writing but is reasonably necessary to perform the agent's standard duties.

Apparent Authority

Authority that a third party reasonably believes an agent possesses based on external indicators or conduct, even if not actually granted.

Principal

The insurance company that authorizes an agent to represent it and act on its behalf.

Indemnity

The legal principle of restoring an insured party to the approximate financial state they were in prior to a covered loss.

Good Faith

An obligation under contract law where both parties act honestly and intend to fulfill their obligations without deception.

Bad Faith

Acting dishonestly or intentionally failing to honor contractual agreements and obligations.

Representation

A statement made on an application that the applicant believes to be true to the best of their knowledge.

Misrepresentation

A false or inaccurate statement made on an application, whether intentional or unintentional.

Warranty

A binding promise or statement of guaranteed fact within a contract; a breach invalidates the contract.

Concealment

The intentional or unintentional failure to disclose a known material fact that should have been provided to the insurer.

Fraud

An intentional falsehood or misrepresentation designed to deceive another party and secure an unfair or unlawful gain.