Hazard is a condition or situation that increases the chance of loss in an insured risk. There are two elements to hazard that an insurers needs to carefully consider, that is, the physical hazard and the moral hazard. Both contribute to the chance of a loss…
Moral Hazards are concerned with the attitude and conduct of people. They indicate those dangers which relate to character, integrity and mental attitude of the insured. They are losses that result from dishonesty or indifference. Insurance Companies suffer losses because of fraudulent or inflated claims. These are not visible and cannot be identified by mere inspection of the risk or subject of insurance. In every risk, an element of moral hazard may be to some degree, always present.
Examples of Moral Hazard:
Physical Hazards are physical conditions that increase the possibility of a loss. They indicate the dangers of the subject of insurance which can be identified by inspection of the risk.
Examples of Physical Hazard:
Nature of occupation of the premises – storage of hazardous materials etc.
Maintenance and upkeep of the premises.
System of heating and lighting – electrical wiring checked on a regular basis and up to date.
Distinction between Physical and Moral Hazards:
Physical hazard relates to the subject-matter of insurance whereas moral hazard relates to the character, integrity and mental attitude of the insured.
Physical hazard can be seen, assessed and rated accordingly whereas moral hazards are not visible and cannot be assessed.
Physical hazards can be dealt with by applying excesses, loadings, cover exclusions or other conditions. Moral hazards cannot be easily checked or controlled by such methods so these are dealt with by cautious and selective underwriting at the outset.
Remember – A physical hazard is a physical condition that increases the possibility of a loss. Moral hazards are losses that results from dishonesty and the attitude and conduct of people.
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