Source: The ILS Introduction to General Insurance Level 1 Licensing Program
Insurance is all about risk sharing. It’s not a new idea having been around for thousands of years.
Risk sharing is a way of helping to ensure that a loss does not spell financial ruin for a person or business. It involves coming up with ways to accomplish that. Before the days of insurance companies, people came up with ideas for risk sharing on their own.
i) Back in the days of the caveman, when a hunter was killed in the hunt, his widow and family were supported by the other hunters.
ii) The Yangtze River in China is a treacherous waterway and early traders traveling the river had their work cut out for them. Rather than take their entire trading goods over the many rapids on their own, they would meet at a sheltered area of the river and place a portion of their cargo in each of the many boats gathered there. This way, if one boat failed to negotiate the rapids safely, every boat owner still had some of their goods in the other boats. No one faced the prospect of losing everything and having to start their business over again. That’s what insurance does – it’s all about risk sharing
Today, insurance companies take money from thousands of people and, for all practical purposes, keep that money in a pool from which to pay losses. The basic concept hasn’t changed – each contributor’s money is used to pay the losses of the few in their group who will have them. Said another way, insurance is a mechanism for sharing the losses of the few among the many.
To Learn More About General Insurance register for the ILS Introduction to General Insurance Level 1 Licensing Program. Upon successful completion of this program you will have achieved your Level 1 General Insurance Sales Person License.
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Definition of Insurance
It has been said nothing happens without insurance. No homes or businesses are built; fewer business ventures are started; fewer loans are given; etc.
So, what is insurance?
Point 1: The Insurance Act (or equivalent legislation) in each province provides a definition for the term “insurance.” The standard definition is as follows:
Insurance means “the undertaking by one person to indemnify another person against loss or liability for loss in respect of a certain risk or peril to which the object of insurance may be exposed or to pay a sum of money or other thing of value upon the happening of a certain event.”
This definition can be broken down as follows:
Point 2: Insurance consists of an agreement whereby one party agrees to assume the financial responsibility for the losses of another party.
Example: Liam and Olivia Stephens could never afford to pay for the repair or replacement of their home if they were to have a large or total loss. So, they decided to purchase insurance for that eventuality. The ABC Insurance Company is in the business of insurance and it agreed to enter into a contract with the Stephens that would indemnify them for certain of their losses.
Point 3: Insurance includes payment for the loss of property of others for which the insured was legally responsible.
Example: Most homeowners and commercial property insurance policies include insurance for the property of others for which the insured was responsible.
Point 4: The insurance company is required to provide only as much insurance as is needed to indemnify the insured for their loss. On property insurance policies, that means that the insured is entitled to receive no more and no less than the value of the property as it existed immediately prior to the loss.
Example: The Stephens’ living room furnishings were destroyed by fire a month ago. They would be entitled to an insurance settlement that was for no more than the value of those furnishings on the day of the loss.
The Principle of Indemnity is one of the most important principles of insurance. It is discussed in detail later in this course.
Point 5: Insurance payment is required to be made only when the peril that caused the loss is insured by the policy.
Example: The insurance contract purchased by the Stephens does not include coverage for flood or earthquake. So, it makes sense that the insurance company would not be responsible for the payment of any loss or damage caused by flood or earthquake. On the other hand, if the Stephens’ insurance contract provided insurance for fire and their property was damaged by an accidental fire, the insurance company would be responsible to pay that loss.
Point 6: Insurance is intended to pay for losses that may occur at some future date. Said another way, insurance contracts are designed to provide insurance for loss or damage that is both accidental and future. That is their very essence.
In legal terms, the event causing the loss must have been a “fortuitous event” which means that it happened by chance or accident. A fortuitous event is also defined as “an unforeseen occurrence, not caused by either of the parties, nor such as they could prevent.”
- i) An insured could not trash their home and expect that the vandalism coverage provided by their homeowner’s insurance policy would respond to pay the claim. Also, all property insurance policies exclude loss or damage to insured property resulting from the criminal acts of insureds.
- ii) While no insurance company will provide insurance for loss or damage to property that was intentionally caused by any person insured by the policy, coverage would be provided when damage to insured property has been intentionally caused by others. Such damage falls within the definition of “fortuitous” as being “an unforeseen occurrence, not caused by either of the parties, nor such as they could prevent.”
There is no insurance policy that will provide insurance for losses that have already happened. Insurance contracts provide protection for future events only.
Example: The Stephens had a fire loss last Friday. They cannot purchase an insurance policy on the following Monday with the expectation that the damage caused by that fire would be paid by the insurance company. Insurance is about paying for losses that might happen in the future and not those that have already occurred.
Point 7: The insurance company can choose the method to be used to provide the insured with a complete indemnity.
Payment can be made:
- in the form of money: usually for smaller losses; or
- other thing of value: costs to repair, rebuild or replace the lost or damaged property.
It is entirely the insurance company’s choice as to which method of payment they want to use. In cases where the property is being repaired, rebuilt or replaced, payment may be made directly to the supplier of the goods or services on behalf of the insured.