Which term describes the tendency toward increased risk because of an applicant's character or reputation, including potential lying or fraudulent claims?

Which term describes the tendency toward increased risk because of an applicant's character or reputation, including potential lying or fraudulent claims?

• A. Hazard
• B. Peril
• C. Morale hazard
• D. Moral hazard

Answer: (D)

Moral hazard is the tendency toward increased risk because of the insured’s character or reputation, including the possibility of lying or making fraudulent claims. Underwriters worry about moral hazard because knowing insurance may tempt someone to misrepresent facts or reward dishonest behavior, which raises the likelihood or size of losses. This differs from morale hazard, which is more about careless or indifferent behavior due to coverage rather than intentional fraud. Hazard and peril are broader terms: a hazard is a condition that increases risk, while a peril is the actual cause of loss. The situation described specifically involves dishonest or fraudulent potential, which is why moral hazard is the right term.

Moral hazard is the tendency toward increased risk because of the insured’s character or reputation, including the possibility of lying or making fraudulent claims. Underwriters worry about moral hazard because knowing insurance may tempt someone to misrepresent facts or reward dishonest behavior, which raises the likelihood or size of losses. This differs from morale hazard, which is more about careless or indifferent behavior due to coverage rather than intentional fraud. Hazard and peril are broader terms: a hazard is a condition that increases risk, while a peril is the actual cause of loss. The situation described specifically involves dishonest or fraudulent potential, which is why moral hazard is the right term.