| Principles of Insurance (Part 1) | ||
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The criteria for risk in insurance As we've seen, not all types of risk can be covered by insurance policies. How, then, do you determine if a risk is insurable? The posed risk must typically comply with all four of the following criteria to be considered for insurance coverage: 1. The risk must be definite as to time and type 2. The risk of loss must be unexpected (fortuitous) 3. The risk must be large enough to justify insurance 4. The potential loss must have a value that can be assigned The risk must be definite as to time and type The risk of loss must have some definition as to time and type in order for insurance to apply. Typically, but not always, the loss cannot be something that takes place gradually. The risk of loss must be unexpected (fortuitous) A loss typically must be accidental or "fortuitous" - that is, unpredictable and unexpected. As mentioned earlier, it cannot be a loss that is certain to happen. Nor can the loss be something that is done on purpose by the insured such as setting fire to their own home. If the "risk" of loss is expected, it typically cannot be insured. An exception would be with government insurers. The risk must be large enough to justify insurance One of the bases for pricing insurance is the severity for financial loss that the risk presents. The potential for loss must be large enough to justify a premium being charged. For example, it wouldn't make sense to insure a magazine that you bought from a stand, even if you plan to keep that magazine and use it later. Should something happen to the magazine, the loss amounted to $5, which is not worth insuring. It would, however, make sense to insure a pristine, 1st issue of a long-standing comic book series worth $400,000, because if something happens to it, the financial loss would be severe. The potential loss must have a value that can be assigned There must be a mechanism to assign a dollar value to a loss in order for it to be insurable. This is sometimes referred as having a "market value". Insurable interest In order to have an insurable interest, you must be able to demonstrate that you face financial loss if there is a claim under the policy. For example, you would have an insurable interest in your own car because it would be a financial loss to you if it were damaged; whereas you would not have an insurable interest in your company's car. This risk of financial loss could be demonstrated under the following circumstances: |
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| Not only are policy forms, clauses, rules and court decisions constantly changing, but forms vary from company to company and state to state. This material is intended as a general guideline and might not apply to a specific situation. The authors, LunchTimeCE, Inc., CEfreedom, and Insurance Skills Center, and any organization for whom this course is administered will have neither liability nor responsibility to any person or entity with respect to any loss or damage alleged to be caused directly or indirectly as a result of information contained in this course. |
