Insurance terms

To fully understand insurance, let us take a look at the meanings of the following basic terms, which you would encounter from time to time.

“Insurance” -  Insurance is a CONTRACT or arrangement between two parties, called INSURED and INSURER.  The Insurer, in return for a financial consideration called the PREMIUM agrees and undertakes to INDEMNIFY the Insured against LOSS, DAMAGE to the property insured or LIABILITY that may happen during an agreed and specified PERIOD of time, which is PROXIMATELY CAUSED by a PERIL insured against.

“Peril” -  It is a CAUSE of loss, damage or liability, such as fire, earthquake, flood, etc.

“Hazard” -  It is a CONDITION that tends to create or increase the CHANCE of loss.  There are two types of hazards:

1. Physical Hazard – The characteristics of the subject matter of insurance that make it vulnerable to loss.
2. Moral Hazard – The honesty or integrity of the owner of the property insured or to be insured.

“Risk” - It is the PROBABILITY or chance that a loss would occur.  RISK is also used to refer to the PERSON or property insured to be insured.  It is also used interchangeably with “Peril”. When we refer to a subject matter as “risky”, it means that the probability of loss is HIGH.