Conceptin Principles of insurance
Drill7 items
Moral hazard vs morale hazard (and physical hazard)
Moral hazard is dishonesty: a person willing to cause or invent a loss to collect. Morale hazard is indifference: a person who grows careless because insurance will pay. A physical hazard is a condition of the property or place itself. One letter separates the first two words; the conduct behind them has nothing in common.
A hazard is a condition
A peril causes the loss: fire, windstorm, theft. A hazard is a condition that makes a loss more likely or more severe. The three hazard types sort by where the condition lives, in the property (physical), in a person's honesty (moral), or in a person's attitude toward loss (morale). The principles of insurance page sets them beside risk, peril and the law of large numbers. Some texts add legal hazard, a condition created by laws or court decisions; it never fits a stem about one person's conduct.
Risk, peril and hazard in one house
A cracked chimney flue is a physical hazard. The fire it might start is the peril. The homeowner's risk is the uncertainty over whether that fire happens and what it costs. The three words are not interchangeable, so name the role of each noun in the stem before you look for the hazard type.
Behavior is the dividing line. A wood-shake roof in dry brush country is physical; nobody did anything. An owner who arranges a staged break-in at the shop is moral, because the loss is invented on purpose. A driver who puts off replacing bald tires since the car is insured is morale: no intent to cause a loss, only a lapse in care that the coverage excuses.
Sorting the clue
| Hazard | Where it lives | Stem clue |
|---|---|---|
| Physical | The property or the place | A material, a layout, a location; no one's conduct |
| Moral | A person's honesty | Deliberately, falsely, staged, inflated |
| Morale | A person's attitude | "Insurance will cover it", didn't bother, careless |
Four checks, in order
- Is anyone's behavior described? If not, look to the property or place: a physical hazard.
- Is the behavior meant to cause, exaggerate or fake a loss? Then it is moral hazard.
- Is it a lapse in care excused by the insurance? Then it is morale hazard.
- Does the condition come from a statute or a court ruling? That is the legal hazard some texts list.
One letter, three hazards
0 of 7 answered · 0 right
Decide by where the condition lives: in the property, in a person's honesty, or in a person's attitude toward loss.
Notes on each optionCommit to an answer first. The notes under the item then open on every option: what rules it in or out, and the one word that splits the runner-up from the key.
- Item 01
The owners of a café ignore grease buildup and frayed wiring in the kitchen because 'the insurance will pay if anything happens.' Their attitude is an example of a:
- ACorrect: indifference to loss because 'insurance will pay' is a morale hazard.
- BMoral hazard involves dishonesty, such as setting a fire on purpose, not neglect.
- CThe grease and wiring are physical hazards, but the question asks about the owners' attitude.
- DA peril is the cause of loss, such as the fire itself.
- Item 02
Peter deliberately sets fire to his own house to collect the insurance money. His conduct illustrates which type of hazard?
- AA legal hazard comes from laws or court decisions, not the insured's conduct.
- BMorale hazard is carelessness with no intent to cause a loss, while arson is deliberate.
- CCorrect: deliberately setting a fire to collect insurance is dishonesty, a moral hazard.
- DA physical hazard is a tangible condition, such as faulty wiring, not a person's intent.
- Item 03
Indifference to loss because a person knows insurance will pay is called:
- AA physical hazard is a tangible condition, not an attitude.
- BA legal hazard comes from laws or court decisions that raise loss costs.
- CCorrect: carelessness or indifference because insurance will pay is morale hazard.
- DMoral hazard is dishonesty, such as padding a claim, not indifference; the two are often swapped.
- Item 04
Jane's plumbing bursts, resulting in water damage to her flooring and drywall. When she submits her claim, she falsely claims that several other valuable items were also damaged and needed to be discarded. What type of hazard does this represent?
- ACorrect: falsely claiming extra damaged items to inflate a payout is dishonesty, a moral hazard.
- BThe burst plumbing is the cause of the real damage; the padded claim is a character issue, not a physical one.
- CMorale hazard is carelessness, but Jane is deliberately lying.
- DA legal hazard comes from the legal environment, not a false claim.
- Item 05
What type of hazard is represented by leaving car keys in an unlocked vehicle?
- AA legal hazard comes from laws or court decisions, not a careless habit.
- BA physical hazard is a tangible condition of property, while this is careless behavior.
- CMoral hazard is dishonesty, but leaving the keys in the car is carelessness, not fraud.
- DCorrect: leaving keys in an unlocked car is carelessness about loss, which is morale hazard.
- Item 06
Frank gets into a car crash on a slippery road. The ice present on the road serves as an illustration of a:
- AMorale hazard is a careless attitude, while ice is a condition of the road.
- BCorrect: the ice is a tangible condition that raises the chance of loss, a physical hazard.
- CMoral hazard is dishonesty, which has nothing to do with road conditions.
- DThe peril is the crash itself; the ice only made it more likely.
- Item 07
A homeowner turns the attached garage into a woodworking shop with spray-painting and stores solvents there. This change is an example of a(n):
- AMoral hazard is dishonesty, but nothing here suggests intent to cause a loss.
- BCorrect: spray-painting and stored solvents are tangible conditions that raise the chance of fire, a physical hazard.
- CMorale hazard is carelessness because insurance exists, but this is a change in the property itself.
- DA speculative risk involves a chance of gain, and it is not a type of hazard.
Why underwriters look for hazards
Hazards are what underwriting is built to find. Physical hazards surface on an inspection; moral hazard shows in a claims history from sources such as CLUE or in a misstatement on the application; morale hazard shows in housekeeping and maintenance. The selection and classification side, with the consumer-report rules insurers follow when checking applicants, is on the insurance transaction page.
A false statement on an application is a topic of its own. Whether it voids the policy turns on whether it was a representation, a warranty or concealment, and whether the fact was material.
Hazard questions that come up
Can the same person show both moral and morale hazard?
Yes. The label attaches to the conduct the stem describes, so judge the act in front of you and set aside anything else you are told about the person.
Does morale hazard depend on having insurance?
By definition: the carelessness exists because coverage exists. Moral hazard needs no such link. Dishonesty would be present with or without the policy; insurance simply gives it a target.