Insurance

I

Introduction

Insurance, in law and business, contractual arrangement that provides for compensation by an insurer to an insured party if or when a specified set of circumstances occurs. Such circumstances may include death or personal injury, accident, unemployment or old age, loss of or damage to property, or any one of a number of instances that can be compensated for financially. The insurer conducts its operations by amassing relatively small contributions from many people who are exposed to the risk of occurrence of an unforeseen event in order to create a fund that is used to reimburse those insured who actually suffer from such an occurrence. The contributions of the policyholders are called premiums. A contract of insurance is embodied in a policy that specifies the terms under which the insurer agrees to indemnify the policyholder for loss in consideration of the payment of a stated premium or premiums. For specific details on Life Insurance, see that article.

II

Insurance Policies

An insurance contract often contains an element of contingency, that is, the event insured against must be possible but not certain to occur in a given period of time and must be substantially beyond the control of either insured or insurer. However, this is clearly not so in those cases where, for example, insurance policies are used as a form of old-age pension and the contingency element of reaching a certain age is negligible. Generally, the number of risks involved must be sufficient to compute the chances of occurrence of the event based on the law of averages, and thereby to determine the amount of premium required. In addition to the requirement that the risk be contingent, the policyholder must generally have an insurable interest, that is, the policyholder must be one who would suffer a material loss by the happening of the event. A policy in which the insured does not have such an interest would be deemed a gambling contract and therefore void; an example of such a void policy is one by which a person insured the house of a stranger against fire.

III

Protection

Insurance plays a major role in the modern economy, providing an orderly means for the replacement of property lost or destroyed and for sustaining purchasing power adversely affected by illness, injury, or death. Moreover, the huge reserves accumulated by insurance companies to meet expected claims are invested, thus providing industry with needed funds for capital expansion or other investments.

Insurance companies constantly search for additional business by providing insurance protection against new types of hazards. Most standard homeowners’ policies do not protect against catastrophes, such as earthquakes, nuclear explosion or radiation, war, and certain other perils. Over the past decade, however, insurance companies have provided a wider range of coverage to their clients and it is now possible to insure against most eventualities.

IV

Types of Insurance

Perils often covered by insurance include burglary and theft, vehicle collision, and dishonesty of employees (fidelity insurance). Forms of insurance such as life insurance or maritime insurance are effectively whole subtypes of insurance, with their own norms. Insurance is also available to cover the extension of credit and to guarantee the title to a property, or as part of a mortgage policy. In addition, specialized types of insurance cover damage to glass, boilers and machinery, lifts, animals, and other property, as well as losses to property arising from lightning, wind, tornadoes, hail, storms, insects, blight, bombardment, explosion, and water damage. Many insurance policies are comprehensive, that is, they cover a group of related perils; but most also have exclusion clauses, detailing what events are not covered by the policy.