Welcome to Chapter 1
Before you learn about the different types of insurance policies, you need to understand some basic terminology and concepts. First, you need to know what insurance is and who or what may become insured. You will also learn the terms that are used specifically in property and casualty or liability insurance.
This chapter helps build a foundation of knowledge that makes it easier for you to learn the rest of the material in this course, so it is important for you to master these ideas before moving on to the next section.
Exam Alert!
This chapter's terminology appears throughout the entire exam. Understanding concepts like insurable interest, pure vs. speculative risk, and indemnity is essential for answering questions in later chapters.
What You'll Learn
General Insurance Principles
- - Insurance as risk transfer
- - Insurable Interest (FBB)
- - Pure vs. Speculative Risk
- - Perils and Hazards
- - Indemnity and Subrogation
Property & Liability Terms
- - Accident vs. Occurrence
- - Negligence
- - Burglary, Robbery, Theft
- - Mysterious Disappearance
- - MedPay and Salvage
Liability
- - Absolute/Strict Liability
- - Vicarious Liability
- - Limits of Liability
- - BI, PD, Personal Injury
Other Related Concepts
- - Actual Cash Value (ACV)
- - Deposit Premium & Audit
- - Certificate of Insurance
- - Deductibles
Binders
- - Temporary insurance contracts
- - When binders are used
- - Duration and limitations
- - Real-world examples
Warranties & Representations
- - Warranties vs representations
- - Material misrepresentation
- - Concealment
- - What constitutes fraud
Insured Contract
- - Contractual liability
- - Types of insured contracts
- - Leases, easements, agreements
- - Real-world examples
Chapter Recap
- - Complete term summary
- - Key numbers to remember
- - Memory aids
- - Quick reference guide
Key Terms to Know
Before diving into the details, familiarize yourself with these foundational terms that appear throughout this chapter:
Depreciation
Reduction in value, particularly due to wear and tear.
Example: A 10-year-old roof originally worth $20,000 may now be worth only $8,000 due to weathering and age.
Exposure
Susceptibility to risk - how vulnerable you are to potential loss.
Example: A beachfront home has high exposure to hurricane damage compared to an inland home.
Implied Warranty
A legal term meaning that a product is suitable for its intended purpose and fits an ordinary buyer's expectations.
Example: When you buy a toaster, there's an implied warranty it will toast bread safely - even if the seller never explicitly promised this.
Insurance Policy
A contract between a policyowner (and/or insured) and an insurance company which agrees to pay for loss caused by specific events.
Example: Your auto insurance policy is a contract where the insurer agrees to pay for covered accidents in exchange for your premium payments.
Insurer (Principal)
The company who issues an insurance policy and promises to pay claims.
Examples: State Farm, Progressive, Allstate, GEICO are all insurers.
Obsolescence
Depreciation in the value of property due to becoming outdated, even if it still works.
Example: A factory with machinery from the 1980s suffers obsolescence because modern equipment is far more efficient.
Premium
The money paid to the insurance company for the insurance policy.
Example: You pay $150 per month as your premium for auto insurance coverage.
Tort
A wrongful act or the violation of someone's rights that leads to legal liability (a civil wrong, not a crime).
Example: Negligently causing a car accident is a tort. The injured party can sue you for damages in civil court.
Chapter 1 Quick Reference
Depreciation
Value loss from wear/tear
Exposure
Susceptibility to risk
Premium
Payment for coverage
Tort
Civil wrong causing liability
Obsolescence
Outdated = less value
Implied Warranty
Unwritten product guarantee
Insurance Policy
Contract for coverage
Insurer
Company issuing policy
Practice Chapter 1
Reinforce your learning with flashcards and quizzes for this chapter