Peril vs. Hazard in the Insurance Industry: An Overview
The words "peril' and "hazard" may seem virtually synonymous but they mean very different things in the insurance industry.
A peril is a potential event or factor that can cause a loss, such as the possibility of a fire that could engulf a house.
A hazard is a factor or activity that may cause or exacerbate a loss, such as a can of gasoline left outside the house door or a failure to regularly have the brakes of a car checked.
Essentially, a hazard makes a peril more likely to occur or makes it worse.
Key Takeaways
A peril is a potential adverse event.
A hazard makes that event more likely.
Hazards are divided into three classifications: physical, moral, and morale.
Peril means danger, and it has a connotation of imminent danger. A rockslide is a peril to anyone standing underneath the cliff when the rocks start sliding.
In insurance contracts, the perils that are covered are usually specified. Fire, wind, water, and theft, are the perils that are commonly listed. However, note that the language may indicate that the damage will not be covered in certain circ*mstances, such as if the insurance company finds that neglect by the insured caused the damage or made it worse.
This is the root cause of many disputes between insurer and insured. For example, the insurer may deny a claim for roof damage after a storm, citing owner neglect in not replacing an old roof.
In effect, the insurer is citing maintenance neglect as a hazard.
Hazard
Before deciding to provide coverage, an insurer may consider the particular hazards that make one candidate riskier than most others. A hazard may be any action, condition, habit, circ*mstance, or situation that makes a peril more likely to occur or a loss more likely to be suffered as the result of a peril.
The insurance industry commonly divides hazards into three categories: physical, moral,and morale.
Physical Hazards
Physical hazards are actions, behaviors, or conditions that cause or contribute to peril. Smoking is considered a physical hazard because it increases the chance of a fire occurring. It also is considered a physical hazard in regard to health insurance because it increases the probability of severe illness.
Frayed electrical wiring or liquid spills are physical hazards, as are a number of activities, such as working at high altitudes and operating heavy equipment.
Moral Hazards
Moral hazards are wrongful behavior or conduct.
Health insurance companies are concerned with moral hazards that lead to fraudulent claims, such as auto accident victims who invent or exaggerate their injuries.
The insurance industry itself may be a morale hazard. Having insurance may make people less careful about avoiding injury or illness since they have insurance to cover the costs.
A business owner who ignores health and safety concerns in the workplace has created a moral hazard. Failing to properly maintain business structures is a moral hazard.
Morale Hazards
Morale hazards are careless or reckless attitudes that can cause peril.
It has been speculated that the insurance industry itself causes a morale hazard. That is, an individual who is covered by insurance might be less likely to safeguard health or property than one who will lose everything if a disaster occurs.
Even the legal system is sometimes considered a morale hazard as it may encourage people to sue for monetary gain even when they have little or no cause.
A peril is a potential event or factor that can cause a loss, such as the possibility of a fire that could engulf a house.A hazard is a factor or activity that may cause or exacerbate a loss, such as a can of gasoline left outside the house door or a failure to regularly have the brakes of a car checked.
A peril is the cause of the loss and a hazard increases the likelihood of a peril happening. Perils and hazards aren't synonyms, but they're sometimes mistakenly interchanged when discussing homeowners insurance.
One of three broad categories of perils commonly referred to in the insurance industry which include not only human perils, but also natural perils and economic perils.
In conjunction with the two different types of risk (speculative and pure), there are two other concepts to become familiar with: (1) Perils and (2) hazards. A peril is the cause of a risk. A peril is the immediate specific event causing loss and giving rise to risk.
Hazard insurance is coverage that protects a property owner against damage caused by fires, severe storms, hail/sleet, or other natural events. As long as the specific weather event is covered within the policy, the property owner will receive compensation to cover the cost of any damage incurred.
Whereas hazard insurance only covers damage to the structure of the home, homeowners insurance covers damage to the home, damage or theft of personal property, and personal liability. The two are packaged together to offer homeowners comprehensive coverage for their home and belongings.
A peril is a potential event or factor that can cause a loss, such as the possibility of a fire that could engulf a house. A hazard is a factor or activity that may cause or exacerbate a loss, such as a can of gasoline left outside the house door or a failure to regularly have the brakes of a car checked.
Wind damage — even when it's from a tornado — is normally a covered peril. Protection usually also includes hail damage, or wind-driven rain or snow that gets inside after a home has been damaged by a storm.
Insurance policies exist to cover you against certain perils, like fire, wind and theft. However, some perils, like water damage, are covered only in certain situations, and others, like neglect, are excluded from insurance entirely. Types of perils in home insurance.
An insured peril is a risk that is covered under the policy, while an uninsured peril is not. Insured perils, for example, often include fire and theft, so if one of these results in a partial or total loss of the property, the policy covers the damage.
Insured perils, as its name implies, provides coverage only for specific events that you've chosen to insure against. You can make a claim only when one of the listed peril events occurs. On the other hand, all-risks is on an exclusion basis, covering everything except for listed events.
“Moral hazard” refers to the risks that someone or something becomes more inclined to take because they have reason to believe that an insurer will cover the costs of any damages. The concept describes financial recklessness. It has its roots in the advent of private insurance companies about 350 years ago.
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.
A peril is the direct cause of a loss, or the source of the loss. For example, if your house is damaged by a lightning strike, the lightning strike is considered to be the peril. If your house catches on fire, then fire will likely be considered the peril.
What is a peril in insurance? In insurance, the definition of peril is any event, situation, or incident that causes property damage or loss. Fire, theft, wind, and vandalism are common perils that homeowners insurance can cover.
All-risk policies cover any event that the policy doesn't specifically exclude. These policies are also known as open perils policies. Named perils policies cover only the events listed in the policy.
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