A unified theory of insurance risk

Abstract

There exists a high degree of uncertainty as to the boundaries and role of risk in the framework of contract law. This uncertainty exists even in the context of insurance law where the subject of the contract is necessarily the commodity of risk. While risk has been probed and examined as a matter of business strategy by several prominent studies and by experts who have catalogued human thought regarding risk, risk has not been the subject of systematic examination in the legal sphere. What follows is a reexamination of how we deal with the concept of risk within insurance law. My aim is to show that an insured's behavior, the notion of risk, and basic insurance law doctrine are all related. I begin by analyzing how general contract law has handled risk and note the limitations of contract law as applied to insurance due to its core: risk. Next, I examine the essence of the insurance bargain by focusing on risk as a commodity, and look at insurance risk in light of basic contract principles. Because describing risk as a commodity is of little value without understanding what risk is, I then discuss what risk means in the insurance context and what it does not mean. This illuminates both the role of risk and the role of the insured in the insurance bargain. Lastly I use the role of the insured and the notion of risk as a commodity to explain how several insurance law doctrines can be traced to and explained by fundamental principles of contract law. Relying on these principles, the examination will show that an insured's ability to alter the risk calculus made by the insurer should, as a matter of contract law, have consequences.