Insurance definition
What is insurance?
California Insurance Code §22 defines insurance as:
“A contract whereby one undertakes to indemnify another against loss, damage, or liability arising from a contingent or unknown event.”
Here’s what each part means:
- Contract: There must be a formal agreement between two parties.
- Indemnify: The insurer promises to financially compensate the insured for specific losses.
- Contingent or unknown event: The event that triggers payment must be uncertain in timing or occurrence (for example, a fire, accident, or death).
Examples of insurance under CIC §22:
- Homeowners insurance covering damage due to fire
- Auto liability insurance covering third-party injury claims
- Life insurance pays a death benefit to beneficiaries
Risk
Insurance is designed to indemnify - to restore the insured to their original financial position after a covered loss. It isn’t meant to create an opportunity for gain or profit.
This idea is called the principle of indemnity. It means the insured shouldn’t profit from an insurance claim. Instead, the claim should put them back in the same financial condition they were in before the loss - no better and no worse. This keeps insurance focused on covering losses rather than creating financial gain.
Pure risk involves only the possibility of loss, and it can be managed through insurance.
Speculative risk includes the possibility of gain. Gambling and investing in the stock market are common examples: you might lose money, but you might also come out ahead. Speculative risk is not insurable.
What is an insurable event?
California Insurance Code §250 provides this definition:
“An insurable event is any contingent or unknown event, whether past or future, which may cause loss or damage to a person having an insurable interest, or create a liability against him.” Examples of insurable events:
- Theft of a vehicle
- A worker slipping on a job site (potential liability)
- Death of a key employee in a business
Example questions
Jessica owns a small retail store. She purchases a business owner’s policy that covers theft, fire, and liability. One week after purchasing the policy, a fire damaged her storage room.
Does this situation meet the definition of insurance under CIC §22 and involve an insurable event under CIC §250?
Yes. The policy is a contract of insurance because it indemnifies Jessica against loss from a specified peril, satisfying the definition of insurance under CIC §22. The fire is also an insurable event under CIC §250 because it is a contingent event that caused a loss to someone with an insurable interest.