Recognizing a Moral Hazard in the Underwriting of Insurance

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The moral hazard is the increase in uncertainty caused by personal acts of individuals. These acts may contribute to the probability or severity of loss. The individual creating the problem may be the policyholder or another person. In either case the chance of loss is increased. A moral hazard may be present in every line of insurance. No underwriter can ignore it without incurring an increased risk of substantial loss. The moral hazard is very difficult to detect and therefore very dangerous to the insurer.

“Moral hazard” is the term used to denote the incentive that insurance can give an insured to increase the risky behavior covered by the insurance. [May Dept. Stores, 305 F.3d 597, Erickson-Hall Constr. Co. v. Scottsdale Ins. Co. (S.D. Cal., 2019)]

Some underwriters think only of the intentional fraud when they use the term “moral hazard."