Keywords: General Insurance Principles and Concepts

Adhesion

One party (the insurance company) has prepared the contract with no negotiation between the applicant and the insurer. The applicant adheres to the terms of the contract on a "take it or leave it" basis when accepted.

Aleatory

An element of chance and potential for unequal exchange of value or consideration for both parties. This contract is conditioned upon the occurrence of an event.

Concealment

The failure by the applicant to disclose a known material fact when applying for insurance. The purpose of this information is to defraud the insurer (to obtain a policy that might not otherwise be issued if the information were revealed), the insurer may have grounds for voiding the policy.

Conditional

The insurer's promise to pay benefits depends on the occurrence of an event covered by the contract. The insurer's obligations under the contract are dependent on the performance of certain acts by the insured or the beneficiary.

Consideration

The part of an insurance contract setting forth the amount of initial and renewal premiums and frequency of future payments. May also include the initial application.

Estoppel

The legal impediment to one party denying the consequences of its own actions or deeds if such actions or deeds result in another party acting in a specific manner or if certain conclusions are drawn.

Fiduciary

The responsibility an insurance producer has to account for all premiums collected and provide sound financial advice to clients.

Fraud

The deliberate knowledge of or intentional deceit with the objective of making false statements in order to be compensated by an insurance company.

Hazard

any factor, condition, or situation that creates an increased possibility that a peril (a cause of a loss) will actually occur.

Homogeneous Exposure Units

Similar objects of insurance that are exposed to the same group of perils.

Indemnity contract

This contract attempts to return the insured to their original financial position.

Insurance Policy

A written contract in which one party promises to indemnify another against loss that arises from an unknown event.

Material misrepresentation

A false statement made by an applicant that would influence an insurer in determining whether or not to accept the risk.

Moral Hazard

A hazard brought on by personal reputation, character, associates, personal living habits, financial responsibility, and environment, as distinguished from physical health, upon an individual's general insurability.

Morale Hazard

A hazard arising from indifference to loss because of the existence of insurance. Careless attitude.

Parol Evidence Rule

When parties put their agreement in writing, all previous verbal statements come together in that writing, and a written contract cannot be changed or modified by oral evidence.

Physical Hazard

Physical or tangible conditions that make a loss more likely to occur.

Policy rider or endorsement

A legal attachment amending a policy. Additional benefits or a reduction in benefits are often incorporated in policies by the attachment of either a benefit or an exclusion rider.

Reasonable expectations

the insured is entitled to coverage under a policy that any sensible and prudent person would expect it to provide.

Reinsurance

The acceptance by one or more insurers of a portion of the risk underwritten by another insurer who has contracted for the entire coverage.

Representation

A statement made by the applicant that they consider to be true and accurate to the best of the applicant's belief.

Risk Management

The process of analyzing exposures that create risk and designing programs to handle them is called risk management.

Risk Pooling/Loss sharing

Spreads risk by sharing the possibility of loss over a large number of people. It transfers risk from an individual to a group.

Subrogation

The right for an insurer to pursue a third party that caused an insurance loss to the insured.

Unilateral

Only one party, the insurer, makes any kind of enforceable promise.

Utmost Good Faith

Both the policyowner and the insurer must know all material facts and relevant information. There can be no attempt by either party to conceal, disguise, or deceive.

Void

A contract without legal effect.

Voidable

An agreement that may be set aside by one of the parties in the contract for a reason satisfactory to the court.

Waiver

A waiver is the voluntary giving up of a legal, given right.

Warranty

A statement made by the applicant that is guaranteed to be true in every respect. It becomes part of the contract and can be grounds for revoking the contract if found to be untrue.