Other Than Life (OTL) Practice Exam

Which of the following would be defined as a moral hazard in insurance?

1. Intentional damage to property for profit

2. Lack of maintenance leading to deterioration

3. Accidental damage during use

4. Unpredictable natural events

The correct answer is: Intentional damage to property for profit

The concept of moral hazard in insurance refers to situations where an individual's behavior changes as a result of having insurance coverage, often leading to riskier actions that can increase the chance of a loss. Intentional damage to property for profit exemplifies moral hazard, as the insured party may feel incentivized to inflict harm on their property to claim insurance money, thereby manipulating the system for personal gain. In contrast, lack of maintenance leading to deterioration does not imply a change in behavior due to insurance coverage; rather, it reflects negligence or a failure to uphold responsibilities regardless of insurance. Accidental damage during use generally represents a standard risk covered by insurance and does not involve intent or induced risk-taking behavior. Unpredictable natural events are external risks that cannot be controlled by the insured and do not involve any moral or ethical decision-making on their part related to their insurance situation.