In the world of insurance, the terms hazards and perils in insurance are often used interchangeably. Especially when it comes to describing the various risks faced by insureds and insurers. However, these ideas are interconnected. Both terms have specific applications and can be further broken down into various subcategories.
Hazards And Perils In Insurance
First, a hazard describes anything that increases the potential of a loss. (An unintended, unforeseen event that causes injury to an insured or damage to property
For insurance purposes, hazards are classified as one of four types:
- Physical hazards
- Legal hazards
- Moral hazards
- Morale hazards
A physical hazard increases the likelihood of a loss occurring due to inadequacies in the condition, structure or operation of an insured or insured property. For example, a roof covered with heavy snow might be considered a physical hazard when it comes to homeowner’s insurance. At the same time, a health insurance policy might consider an insured’s heart condition to be a physical hazard.
A legal hazard meanwhile, increases the likelihood and severity of a loss due to a condition imposed by the legal process that forces an insurer to cover a risk that it would otherwise deem uninsurable. For example, the American legal system motivates many people to bring litigation suits in order to realize the potential lucrative profits in doing so. Anything that might prompt a lawsuit involving an insurer can be considered a legal hazard.
A moral hazard, as the name might suggest, results from fraudulent acts committed by an insured. Examples of moral hazards include filing false insurance claims, or misrepresenting oneself on a life insurance application in order to obtain coverage or more favorable coverage terms.
Not to be confused with moral hazards, a morale hazard results from a lack of reasonable care put forth by an insured. For example, consider an insured whose wallet is stolen from his car because the doors were left unlocked. This would be a morale hazard, as the insured did not take the necessary care to prevent his valuables from being stolen.
Moral Hazards versus Morale Hazards
The difference between a moral hazard and a morale hazard is intent.
A moral hazard arises out an individual’s deliberate intent to deceive.
A morale hazard, on the other hand, results from unintentional carelessness or laziness.
Perils in Insurance
When used in the insurance industry, the term peril applies only to property insurance. While perils and hazards sound similar, a peril actually results from a hazard. A hazard merely increases the likelihood of a loss. And a peril is the specific event that causes a loss.
- A roof covered with snow can be a physical hazard. If the amount of snow is so great that the roof ultimately collapses, then the snow is the peril.
- A fire breaks out in an office building, which causes the sprinkler system to activate. This causes considerable water damage. Even though the fire caused the problem, the water damage itself is the peril.
- A burglar breaks into a restaurant safe and steals a great deal of money. In this case, the act of theft is the peril.
Property insurance often covers many different types of perils. However, certain perils (such as floods or earthquakes) can be excluded from coverage due to the catastrophic amount of havoc they can wreak.
Those who wish to know more about common perils covered (or excluded) under a property insurance policy should contact a property insurer or their local insurance department. We hope you have learned more about the differences of Hazards And Perils In Insurance.