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As we go through life, we are presented with many risks. Such risks can be minor, such as stumbling as we walk, or a major risk, such as a tornado leveling our home. Insurance is designed to provide a means for us to recover from the unexpected.
In providing coverage insurance companies use very specific words to define the level of harm or injury. Generally, we use words like “risk,” “peril” and “hazard” to mean similar things. Within the insurance industry, these terms each have a distinct meaning.
Risk is used when speaking of a chance for loss or injury. It is used to describe an event that is unexpected or unpredictable. Predictable events cannot be insured. A value can be placed on the consequences of an unpredictable event and can be insured.
Peril is any event or situation that can cause a loss — whether it is loss of mobility, loss of life or loss of the use of property. Peril is the cause for insurance and people can be protected from the consequences of perils. Perils can be hurricanes, robbery or accidents.
Hazard is anything that increases the chance of loss or increases the amount of loss. A burnt out light bulb could result in someone being injured on a darkened stairway. The peril is a fall, the hazard is the burnt out light bulb. A faulty water heater may cause water damage due to leakage. The peril is minor flooding, the hazard is the leaky water heater.
Insurance companies separate risks based on the type of injury or loss. Personal risks are those that involve income, personal mobility, life, or illness. Property risks may include the home, fire and theft or damage to the property around the home. Liability risks involve negligence that leads to injury, death or property damage. This negligence may be any failure to take reasonable care to prevent damage to a person or property.
Insurable risks are those that require an insurance company to pay in the event a particular situation, as determined by the policy, occurs. Pure risks, those that are insurable, are accidental and unintentional. Even though a risk cannot be predicted, the monetary consequence of such a risk occurrence can be determined actuarially. Insurance companies examine the statistics of various scenarios, the frequency of occurrence and the potential loss. A policy is then offered to pay that monetary loss. Insurance cannot and will not pay for those circumstances that are predictable or totally avoidable.
by Mary Fox Luquette
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