Chapter 1: WHAT IS INSURANCE?
Chapter 1 of the New Appleman on Insurance Law Library Edition begins in Section 1.01 with a discussion of the reasons insurance exists. Risk exists throughout the world; life is uncertain, and we cannot foresee exactly what will happen in the future. These risks create insecurity, and sometimes insecurity is undesirable. Insecurity can prevent business activity, stifle economic development, and cause personal anguish. There are a variety of techniques of managing risk, but at some point it is desirable for risk-averse persons to transfer their risk to another entity. Markets exist where these risks can be transferred, and the mechanism for doing so is insurance. Insureds pay a premium to the insurer in exchange for the insurer's promise to assume the insured's risk. Taking advantage of the law of large numbers, the insurer can distribute the risks assumed in a variety of similar transactions across a large pool of insureds and thereby effectively manage the risk, earning a return in the process. The next section (Section 1.02) contains a brief history of the insurance business, which is a story of efforts to manage risk through increasingly more sophisticated insurance mechanisms.
Many contracts transfer risk but are not commonly understood as ''insurance contracts.'' In Section 1.03 a definition of insurance is provided in order to distinguish non-insurance transactions from insurance contracts. If the contract involves insurance, it is typically subject to regulation as the business of insurance; thus, the definition of insurance is important to understanding the scope of state regulatory authority.
As discussed in Section 1.04, the business of insurance is subject to state legislative and administrative regulation, but much insurance regulation is accomplished by courts through their normal adjudicatory functions. These complementary regulatory systems help define two principal domains of insurance law: one pertains to the regulation of insurance entities, and the other pertains to the regulation of the insurer-policyholder relationship. Together, these sources of authority create the body of law commonly understood as ''insurance law.''
Insurance law, as explained in Section 1.05, is comprised of a number of fundamental concepts and assumptions, including:
The discussion in Section 1.06 covers some key phrases and terms of art that often appear in discussions of the insurance business and insurance law. The discussion in Section 1.07 continues in this vein by describing the structure and contents of an insurance policy.
The discussion in Section 1.08 explores the different ways insurance is classified. These include:
The discussion in Section 1.09 examines modern efforts to ''stretch'' the definition or meaning of insurance through modern financial arrangements, including self-insurance, the use of captives, fronting arrangements, and new financial instruments which are used like insurance but are not the same as the traditional insurance contract.
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