Florida 2-20 General Lines Agent (Property, Casualty, Commercial Lines and Florida Law)General InsuranceHard
A Florida General Lines Agent is explaining the concept of 'moral hazard' to a new agent. Which of the following best illustrates a moral hazard?
- AA homeowner failing to repair a leaky roof, leading to water damage.
- BA business owner intentionally setting fire to their struggling business to collect insurance money.
- CA driver with a poor driving record causing an accident.
- DLiving in a flood zone, increasing the likelihood of water damage.
Show answer & explanationAnswer & explanation
Correct answer: B. A business owner intentionally setting fire to their struggling business to collect insurance money.
Moral hazard refers to an increase in the probability of loss due to an insured's dishonest tendencies or character. Intentionally setting fire to a business to collect insurance is a classic example of this, as it involves a deliberate act motivated by the existence of insurance.
Why the other options are wrong
- A. This is an example of a morale hazard (indifference to loss), not moral hazard.
- C. This is an example of a physical hazard (risk associated with a person's characteristics), not moral hazard.
- D. This is an example of a physical hazard (environmental condition), not moral hazard.
Moral Hazard
A condition that increases the probability of loss due to an individual's dishonest tendencies or character, often involving an intentional act of causing a loss.
- Involves dishonesty or fraud
- Often an intentional act
- Distinct from morale hazard (indifference)
Memory trick: Moral: M for Malice, M for Murder (of property for profit).