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.
- 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 circumstances, 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.
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, circumstance, 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 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 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 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.