Hazard, in the context of insurance, refers to a condition or situation that increases the likelihood of a loss occurring. It is essentially a circumstance that has the potential to cause harm or damage, which can result in a claim being made against an insurance policy. Hazards can be classified into different categories depending on their nature and the way they influence risk.
Physical hazards are tangible conditions that increase the chances of a loss. Examples include icy roads that might lead to car accidents, or a poorly maintained building that could contribute to a fire. Moral hazards are associated with the behavior of individuals, such as dishonesty or lack of care, which might lead to exaggerated claims or neglect that heightens the risk of loss. Morale hazards, often confused with moral hazards, involve carelessness or irresponsible actions because individuals know they are insured, such as leaving doors unlocked or ignoring security measures.
Legal hazards are related to the regulatory or legal environment that can increase the frequency or severity of losses. For instance, changes in laws that lead to higher compensation for injuries can be considered a legal hazard.
It is important for policyholders to understand and manage hazards effectively to maintain their coverage and to avoid increases in premiums, which are often the result of higher risks associated with unaddressed hazards. Insurance companies assess the level of hazard associated with a policy applicant or an insured property or entity to determine the terms of coverage and the cost of the insurance policy.