Property and Casualty Insurance Practice Exam

What represents a situation where a person creates a loss scenario to collect from an insurance company?

1. Physical hazard

2. Moral hazard

3. Morale hazard

4. Insurable hazard

The correct answer is: Morale hazard

The correct answer pertains to a scenario where an individual engages in dishonest behavior to receive an insurance payout by fabricating a loss. This situation is termed moral hazard. A moral hazard arises when someone is incentivized to take risks or act irresponsibly because they are shielded from the consequences, often due to insurance coverage. In this case, the act of intentionally creating a loss scenario for the purpose of financial gain demonstrates the ethical implications involved, distinguishing it from other types of hazards. Physical hazards refer to tangible conditions that increase the likelihood of a loss but are not rooted in the individual's behaviors or decisions. Morale hazard, on the other hand, involves careless attitudes toward risk that stem from a sense of security provided by insurance rather than outright fraudulent behavior. Insurable hazard is a broader term and does not specifically address the ethical implications behind the actions taken to create a loss. Thus, moral hazard is the most accurate term to describe the act of falsifying a claim to benefit financially from insurance.