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. Insurance companies address physical hazards through risk improvement, policy terms, and specific premiums. 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.