Hazard

What Does Hazard Mean?

A hazard refers to a situation or condition that increases the likelihood of an insured loss occurring. It is best understood in relation to two connected terms: risk, which is the chance of a loss occurring, and peril, which is the actual cause of the loss. For example, drunk driving is a hazard that raises the risk of a peril, such as an accident, occurring.

Insuranceopedia Explains Hazard

A hazard can be categorized into two types: physical and moral. A physical hazard refers to a condition or environment that can increase the likelihood or severity of a loss. For example, smoking indoors is a physical hazard that makes fire or illness more likely. In the smoking-indoors example, the resulting fire would be the peril, and most standard policies will pay out for fire damage caused by a hazard like this, though the specifics of how homeowners insurance handles fire claims depend on the cause. Insurance companies address physical hazards through risk improvement, policy terms, and specific premiums. Properties with serious physical hazards can be harder to insure at standard rates, which is why high-risk homeowners insurance exists for owners who don’t qualify for a regular policy. This type of condition is what hazard insurance, a core component of a standard homeowners policy, is built to cover. On the other hand, a moral hazard relates to ethical conduct. On an individual level, it may involve a dishonest policyholder attempting to file fraudulent claims. On a larger scale, the U.S. legal system may be seen as a moral hazard, as it can encourage people to sue in hopes of a large payout. Insurance companies are unable to manage this type of hazard.