What is an Insurance Hazard?
By Derek Visser
My Insurance Broker
Jun 22nd, 2016 at 11:59 am • Richmond Hill, ON
An Insurance Hazard means:
Hazard is a condition that may cause a Peril to happen or worsen. There are two types of Hazard, Moral Hazard and Physical Hazard. Which leads to the following questions:
- What is a Moral Hazard? And
- What is a Physical Hazard?
A Moral Hazard means:
Moral Hazard is concerned with conditions that relate to the human element of risk. This type of risk is often difficult to identify and can be impossible or nearly impossible to reduce and eliminate entirely. Moral Hazard can refer to fraud, dishonesty, and carelessness leading to an occurrence of Peril or the worsening of Peril.
An example of a Moral Hazard is if a business owner decided to burn his place of business down in attempt to collect the insurance. You will see stories in the news, such as this one, related to Moral Hazard quite often.
Many Moral Hazards are directly attributable to increased insurance premiums, but the largest culprit is insurance fraud. This is not surprising, considering that according to the Coalition Against Insurance Fraud in 2006 it is estimated $80 billion worth of insurance fraud happened in the U.S. alone (Wikipedia, 2016).
A Physical Hazard means:
Physical Hazard pertains to the subject matter of insurance and concerns facts that can be determined via inspection. Examples of Physical Hazard are building construction, a manufacturing process, the location of a home in relation to water tables and water levels, and the locality of a residence in relation to emergency services such as fire stations.
In the case of Physical Hazards much of the risks associated with loss can be reduced and in certain cases completely eliminated. This can be done by recognizing a risk via an inspection and corrective measures can be taken to remove or reduce the chance of a Peril occurring. Fire prevention techniques and following government mandated construction standards are good examples of how to reduce or eliminate the risks of Physical Hazards.