California Life-Only & Accident and Health AgentGeneral InsuranceMedium
A life insurance applicant intentionally fails to disclose a recent diagnosis of a serious, chronic illness on their application, knowing that this information would likely lead to a higher premium or denial of coverage. This action is an example of which type of hazard?
- APhysical hazard
- BMorale hazard
- CLegal hazard
- DMoral hazard
Show answer & explanationAnswer & explanation
Correct answer: D. Moral hazard
Moral hazard involves dishonesty or a tendency to lie or cheat, particularly in relation to an insurance contract. Intentionally concealing a serious medical condition to obtain insurance coverage at a lower rate or avoid denial is a classic example of moral hazard.
Why the other options are wrong
- A. A physical hazard is a physical condition that increases the chance of loss, like a dangerous occupation or a pre-existing illness itself.
- B. Morale hazard (carelessness) is an indifference to loss because of the existence of insurance, such as leaving keys in an unlocked car.
- C. A legal hazard refers to characteristics of the legal system or regulatory environment that increase the frequency or severity of loss.
Moral Hazard
Moral hazard is a condition that increases the probability or severity of loss due to an individual's dishonest tendencies or character.
- Involves intentional dishonesty, fraud, or misrepresentation.
- Often arises when a person believes they can gain from a loss.
- Distinct from morale hazard (carelessness) and physical hazard (physical conditions).
Memory trick: Moral is about character, morale is about carelessness.