Key Concepts in Insurance
- Moral Hazard: Disregard for risks because consequences are not personally borne. Insurers care due to higher loss risk.
- Risk Assessment: Insurers classify applicants by risk levels (above, below, average) to adjust premiums. Data-driven for factors like age/gender for auto insurance, despite individual variations.
- Need for Insurance: Essential for operating businesses, owning property, and obtaining loans, as it pools and manages risk, making large potential losses feasible.
- Loss Control: Insurers encourage safer practices and product standards (e.g., UL certification) by offering lower premiums.
- Insurance Contract Characteristics:
- Basic Requirements: Legal purpose, legal capacity, offer and acceptance, consideration (promise to pay for losses in exchange for premium).
- Utmost Good Faith: Both insured (truthful disclosure) and insurer (fair dealing) must act honestly. Insured's application often part of the contract.
- Representation: Material misrepresentation by the insured can lead to policy cancellation and premium return. Examples include lying about property details or activities.
- Aleatory: Consideration is unequal; premium (<extvalueofcoverage) is paid for a chance of a large payout.
- Conditional: Payment is contingent on a covered peril occurring and the insured fulfilling contract requirements (e.g., notice, cooperation).
- Contract of Adhesion: Standardized contracts where one party (insurer) dictates terms. However, insurance contracts allow for modification via endorsements.
- Unilateral: Insured can compel insurer to pay valid claims; insurer cannot compel insured to pay premiums but can cancel the policy.
- Subrogation: Insurer pays for the insured's loss, then seeks recovery from the responsible third party.
- Types of Insurance:
- Social Insurance: Government-provided or mandated (e.g., Social Security, Unemployment, Medicare, Medicaid, Workers' Compensation, FDIC, crop insurance), offering minimum support.
- Private Insurance: Provided by commercial insurers (life, health, property, liability).
- Structure of an Insurance Contract:
- Declarations Page: Identifies insurer, insured, policy period, covered property/business, limits, and premium.
- Definitions: Clarifies specific words used in the policy.
- Named Insureds: Policyholder and others covered (e.g., resident relatives).
- Coverage (Insuring Agreements): Describes what risks are covered.
- Exclusions: Specifies what is not covered, often with exceptions.
- Conditions: Outlines responsibilities of the insured (e.g., notice of loss, cooperation).
- Deductibles: Amount the insured pays out-of-pocket before insurance responds, promoting carefulness and deterring small claims.
- Endorsements/Riders: Amendments that modify the contract (e.g., add or remove coverage).
- Cancellation: Specifies reasons for policy termination by either party.