There may be an example of first class moral hazard where the insured gives maximum cooperation to the insurers by materializing their suggestions aimed at risk improvement, or where the insured himself is very strict and particular in maintaining the property or premises with such care that the possibility of the happening of the insured event is reduced. Examples of bad moral hazards are also there where the insured fraudulently and intentionally brings about an insured event with the sole motive or making money out of insurance at the cost of insurers.
Examples Of Moral Hazards In Insurance
- Carelessness : It is an implied condition of all insurance contracts that the insured must take all reason. able precaution in averting or minimizing a loss. Carelessness is the cause of most of the accidents and when the insured bet ayes carelessly, an unsatisfactory moral hazard is created.
- Difficult Insured : An insured may be always uncompromising and litigation minded. He may refuse to accept the amount offered by insurers and press for unreasonable amount.
- Fraud : A very unsatisfactory moral hazard exists when a person wants to take out a policy with the intent to make profit.
- Over insurance : Excessive over insurance is apparently an instance of bad moral hazard.
- Maintenance : Bad administration and resultant shabby maintenance of thy, property/premises is an example of bad moral hazard. It is also an example of physical hazard since bad maintenance reflects in the untidy atmosphere around which can be physically seen.
Distinction Between Physical And Moral Hazards
Whatever has been said so far sufficiently distinguishes one from another. However, the readers should note the following
- Physical hazard relates to the subject matter of insurance, whereas, moral hazard relates to the character, integrity and mental attitude of the insured
- Physical hazard can be seen, assessed and rated accordingly, but moral hazards cannot be seen, assessed or rated accordingly.
- Whilst physical hazards can be effectively dealt with by applying excess, franchise, loading or other conditions, moral hazards cannot be easily checked or controlled by such methods. Cautious and selective underwriting is the only possible solution.