Hazard
A hazard is a condition or circumstance that increases the likelihood or potential severity of a loss occurring from a particular peril, classified as physical, moral, or morale hazards.
Exam Tip
Hazard = increases CHANCE of loss. Physical = tangible conditions. Moral = dishonesty/fraud. Morale = carelessness due to having insurance. Peril = actual cause of loss.
What is a Hazard in Insurance?
A hazard is any condition that creates or increases the chance of a loss. While a peril is the actual cause of loss (fire, theft, windstorm), a hazard is a condition that makes that loss more likely or more severe. Understanding hazards is essential for underwriting and risk assessment.
Hazard vs. Peril
| Concept | Definition | Example |
|---|---|---|
| Peril | The actual cause of loss | Fire, theft, lightning |
| Hazard | Condition increasing loss likelihood | Oily rags near furnace (increases fire risk) |
| Risk | The chance of loss occurring | Probability of fire claim |
Types of Hazards
| Type | Definition | Examples |
|---|---|---|
| Physical Hazard | Tangible conditions increasing risk | Faulty wiring, icy sidewalks, poor construction |
| Moral Hazard | Dishonesty or character defects | Intentional arson for insurance money, fraudulent claims |
| Morale Hazard | Carelessness or indifference due to insurance | Leaving doors unlocked, not maintaining property |
| Legal Hazard | Laws or regulations that increase risk | Jurisdiction with high jury awards |
Physical Hazards
| Category | Examples |
|---|---|
| Building Conditions | Faulty wiring, old plumbing, poor roof |
| Location | Flood zone, high crime area, near fire station |
| Occupancy | Restaurant, chemical storage, woodworking shop |
| Personal | Age, health conditions, hazardous occupation |
Moral Hazard Examples
| Behavior | Impact |
|---|---|
| Insurance fraud | Filing false claims |
| Arson for profit | Deliberately destroying insured property |
| Staged accidents | Creating fake incidents for claims |
| Exaggerating claims | Inflating damage amounts |
Morale Hazard Examples
| Behavior | Impact |
|---|---|
| Carelessness | "Insurance will cover it anyway" attitude |
| Poor maintenance | Neglecting repairs because insured |
| Risk indifference | Not taking precautions |
| Over-reliance | Assuming all losses will be paid |
How Insurers Address Hazards
| Hazard Type | Insurer Response |
|---|---|
| Physical | Inspections, premium adjustments, exclusions |
| Moral | Thorough underwriting, investigation, policy cancellation |
| Morale | Deductibles, coinsurance, coverage limits |
Underwriting Considerations
| Factor | Assessment |
|---|---|
| Property inspection | Evaluate physical hazards |
| Credit history | May indicate moral hazard |
| Claims history | Pattern of suspicious claims |
| Background check | Criminal history, prior fraud |
Exam Alert
Hazard = condition that INCREASES loss likelihood or severity. Physical hazards are tangible (faulty wiring). Moral hazards involve dishonesty (fraud). Morale hazards involve carelessness (indifference because insured). Peril = actual CAUSE of loss (fire, theft). Do not confuse hazard with peril!
Study This Term In
Related Terms
Moral Hazard
InsuranceMoral hazard is an increased risk of loss due to dishonesty or character defects of the insured, such as intentionally causing damage to collect insurance proceeds or filing fraudulent claims.
Peril
InsuranceA peril is the specific cause of loss that an insurance policy covers, such as fire, theft, windstorm, lightning, or vandalism. Insurance policies are structured around either named perils (specific listed events) or open perils (all events except exclusions).
Underwriting
InsuranceUnderwriting is the process by which an insurance company evaluates risk and determines whether to accept an application for coverage and at what premium rate.
Exclusion
InsuranceAn exclusion is a policy provision that specifies conditions, circumstances, or types of losses that are not covered by an insurance policy, eliminating the insurer's obligation to pay for those particular claims.