Florida 2-20 General Lines Agent (Property, Casualty, Commercial Lines and Florida Law)Florida Law and EthicsMedium
A Florida 2-20 General Lines Agent is explaining the concept of 'moral hazard' to a new insured. Which of the following scenarios best exemplifies a moral hazard in insurance?
- AAn insured intentionally sets fire to their business to collect the insurance proceeds.
- BA business owner installs a new sprinkler system to reduce the risk of fire and receives a premium discount.
- CA driver with a history of speeding tickets is charged a higher premium for auto insurance.
- DA homeowner fails to repair a leaky roof, leading to extensive water damage, due to financial hardship.
Show answer & explanationAnswer & explanation
Correct answer: A. An insured intentionally sets fire to their business to collect the insurance proceeds.
Moral hazard refers to an increase in the probability of loss due to an insured's intentional or dishonest actions, such as deliberately causing a loss to claim insurance benefits.
Why the other options are wrong
- B. This demonstrates risk mitigation, which would lead to lower premiums, not a hazard.
- C. This reflects adverse selection or underwriting based on increased risk, not a moral hazard.
- D. This is an example of 'morale hazard,' which is indifference to loss due to insurance, not intentional dishonesty.
Moral Hazard
Moral hazard is a situation where an insured intentionally causes or exaggerates a loss to collect insurance benefits, stemming from dishonesty or character flaws.
- Involves intentional dishonesty.
- Increases probability of loss.
- Distinct from morale hazard (indifference).
Memory trick: Hazards are Perilous Risks