Insurance, in law and economics, is a form of risk management primarily used to hedge against the risk of a contingent loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for a premium.

An insurer is a company selling the insurance. The insurance rate is a factor used to determine the amount, called the premium, to be charged for a certain amount of insurance coverage. Risk management, the practice of appraising and controlling risk, has evolved as a discrete field of study and practice.

Commercially insurable risks typically share four

common characteristics

Definite Loss. The event that gives rise to the loss that is subject to insurance should, at least in principle, take place at a known time, in a known place, and from a known cause. The classic example is death of an insured person on a life insurance policy. Fire, automobile accidents, and worker injuries may all easily meet this criterion. Other types of losses may only be definite in theory. Occupational disease, for instance, may involve prolonged exposure to injurious conditions where no specific time, place or cause is identifiable. Ideally, the time, place and cause of a loss should be clear enough that a reasonable person, with sufficient information, could objectively verify all three elements.

Accidental Loss. The event that constitutes the trigger of a claim should be fortuitous, or at least outside the control of the beneficiary of the insurance. The loss should be in the sense that it results from an event for which there is only the opportunity for cost. Events that contain speculative elements, such as ordinary business risks, are generally not considered insurable.

Large Loss. The size of the loss must be meaningful from the perspective of the insured. Insurance premiums need to cover both the expected cost of losses, plus the cost of issuing and administering the policy, adjusting losses, and supplying the capital needed to reasonably assure that the insurer will be able to pay claims. For small losses these latter costs may be several times the size of the expected cost of losses. There is little point in paying such costs unless the protection offered has real value to a buyer.

Calculable Loss. There are two elements that must be at least estimable, if not formally calculable: the probability of loss, and the attendant cost. Probability of loss is generally an empirical exercise, while cost has more to do with the ability of a reasonable person in possession of a copy of the insurance policy and a proof of loss associated with a claim presented under that policy to make a reasonably definite and objective evaluation of the amount of the loss recoverable as a result of the claim.

o Insolvency

Cash flow insolvency is the inability to pay debts upon demand. Balance sheet insolvency simply means that you have more debts than assets. It is possible to be cash flow insolvent at the same time you are balance sheet solvent. This happens when you have money bound up in non-liquid assets. Many taxpayers have experienced this recently, when they have been forced into foreclosure due to the inability to pay their mortgage.

When your liabilities exceed your assets, you are insolvent. If a lender forgives your debt under insolvency, you can file for insolvency exclusion in that amount on your income tax. Otherwise you will have to enter the forgiven debt on your income tax report. Recently many homeowners realized that the cost of their mortgage exceeded the value of their home. These homeowners qualified for the insolvency exclusion on their taxes.

The amount you can exclude can be no higher than the amount by which your liabilities exceed your assets. If the debt forgiven qualifies under the tax code and is used for running a farm, it might not be income at all.

o Chapter twelve or thirteen bankruptcy

If you file a chapter twelve or thirteen bankruptcy, you will file the same income tax report. Include your entire income, as is normal procedure. But do not include any canceled debt on your federal income tax return. Losses in property must be reduced by the total canceled debt.

o Chapter seven or eleven bankruptcy

Under chapter seven or eleven bankruptcy filings, a separate estate is created from your estate prior to filing. You, as a taxpayer and your bankruptcy estate are two distinct entities. Under chapter seven, a trustee is appointed to your estate. The trustee sees to the liquidation of your non-exempt assets. Under chapter eleven, you stay in charge of the estate. You are given debtor-in-possession status. All monies earned after the bankruptcy filing are yours and not part of the bankruptcy requirements. If your bankruptcy petition is rejected, you are responsible for filing an Internal Revenue Service tax form 1040X and become responsible for your income taxes as if you had never made the bankruptcy petition.

You have to file an income tax return during the bankruptcy process. You will not include, deductions, credits, or income belonging to the bankruptcy estate, as it is an entity separate from you. You can choose to end your tax year the day before you file your bankruptcy petition.

If you file for bankruptcy after the first of January, any refund you receive from taxes that year, even if you have yet to file, is an asset in your bankruptcy.

Although federal bankruptcy law mainly regulates bankruptcies, the individual states can have specific guidelines for the process within their jurisdiction. States can typically choose to have their own rules that govern the types of exemptions that the debtor is allowed to keep after filing for a discharge of their debts.

For instance, some states will allow debtors to keep their homes no matter how expensive or extravagant they are whereas other states will force the liquidation of property as an attempt to pay off the debts. Other variations include the types of debt that a debtor can discharge, although many of these are federally mandated without exception.

Florida bankruptcy law heavily favors debtors in regards to the property that they can retain. In fact, Florida has a reputation for being one of the most liberal states in the country for debtors to petition for a discharge of debts. The state government has elected to opt out of the federal regulations concerning the debtor’s lawfully retainable property.

According to Florida bankruptcy proceedings, you can keep more of your personal property during a bankruptcy than in any other state. As a result, many people who plan to file often move to Florida with their assets in order to take advantage of the state’s lenient bankruptcy law.

To see a contrast in the how the bankruptcy law changes from state to state, look at the exemptions that the Maryland law allows. Maryland is stricter in regard to the debtor’s assets that must be liquidated in a bankruptcy.

For instance, a debtor who files bankruptcy in Maryland is only entitled to keep $500 worth of household goods and furnishings as well as $3,000 of cash in their bank accounts. Also according to Maryland bankruptcy law, debtors can only retain up to $2,500 worth of personal property and the rest must be sold or liquidated so the proceeds can go towards paying the creditors.

Different states have varying guidelines regarding bankruptcy law, but each category has specific regulations, too. In a Chapter 7 bankruptcy, for instance, you can have many of your debts completely discharged so you can get a fresh financial start.

On the other hand, Chapter 13 bankruptcy requires you to enter into a repayment agreement that the courts will oversee and make provisions to help you pay off your creditors in a timely manner. Rules also vary as to how much of your property you are allowed to retain when going through a bankruptcy.

Although federally regulated, bankruptcy law hinges on the guidelines of the individual states and the bankruptcy chapter that the debtor chooses to file. While some states have lenient laws that favor the debtor’s situation, the bankruptcy laws in other states tend to favor the creditor.

Until the recent amendments to the federal bankruptcy code, the federal guidelines favored the debtor, but those times have changed and now it is much more difficult for a debtor to completely discharge their debts. As a result, many people either try to find solutions through loopholes in the system or they deal with the ramifications that filing for bankruptcy will have on their financial future.