Understanding Perils and Hazards in Insurance


In Life insurance the risk is that person may die before the insurance policy matures. In Car insurance the risk is that car may get damaged during the tenure of the policy. How can the person die?Hazard in Insurance Person may die of fever, heart attack in an accident or by falling off a building for example. How can a car get damaged? A Car’s part may become faulty or it may crash for example. These possible causes of the occurrence of the loss or risk are called as Perils. So Perils are the causes that can result in materialization of the risk hence effecting in loss. Now there are some things that can increase the likelihood that a loss will occur. For example if the person who is insured is driving rashly or unfortunately living in infected locality the chances of his death go up. Similarly if the car is not serviced regularly its parts may become faulty. These factors that increase the seriousness of the potential loss or likelihood of the occurrence of loss are called Hazards. Hazards can be natural or intentional (to claim insurance). They are divided into following types:

  • Physical Hazards – Hazards that arise from physical conditions are physical hazards. For example polluted environment (can infect insured people), smoking or short circuit (can cause fire in the building), skydiving (increases the likelihood of accident), slippery surface (again increases the risk of accident) etc. So they are related to Operational (means circumstances, surrounding etc), Material (tangible things) or Structural (design) features of a risk situation.
  • Moral Hazards – Hazards that arise from bad intentions of the insured are Moral Hazards. Like if a building is insured but it is intentionally damaged to claim insurance money to rebuild it is a moral hazard.
  • Morale Hazards – Hazards that arise from carelessness or poor attitude of the insured with the thinking that “it is insured hence no worry”. For example smoking in bed, driving rashly, not wearing a seat-belt etc are morale hazards.
  • Legal Hazards – Hazards that could cause a loss due to legal issues, like a court notice about a property, dispute of an insured person or some other similar legal matter which could result in loss for the insured and for which insurance company may have to pay is a Legal Hazard.

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