WHAT IS THE DIFFERENCE BETWEEN A PERIL AND A HAZARD?
What Is The Difference Between A Peril And A Hazard?
When it comes to insurance, the terms hazards and perils are often used to mean the same thing, especially when comparing the different risks looked by the customer and the insurer. Although they involve different things and have different meanings, the two words are similar. Each term has an application and can even be additionally separated into various subcategories.
A peril is any event that can cause a financial loss. Examples include a car crash, death, disability, fires, floods, illness, theft etc. A hazard is something that increases the probability that a peril will occur. Examples include slippery sidelwalks after a snowstorm, driving while under the influence of alcohol, leaving your home doors unlocked etc. So concisely:
- Risk = A probability or threat of damage, injury, liability, loss, or any other negative occurrence.
- Peril = Cause of loss.
- Hazard = Condition that increases the probability of loss.
So hazards increase the risk of a specific peril.
Risks and Hazards in Insurance
In general, a hazard can mean anything that increases the potential for risk, which is an unintended, unexpected occasion that damages an insured person or brings harm to property. In the world of insurance, there are four different types of hazards:
- Physical Hazards
- Legal Hazards
- Moral Hazards
- Morale Hazards
Physical Hazards – A physical hazard improves the probability of a risk happening because of insufficiencies in the condition, structure or activity of an insured person or protected property, which can then lead to a loss. For instance, a rooftop covered in a thick blanket of snow is a physical hazard with regards to property holder’s protection. Another great example comes when you consider medical insurance. A congenital heart condition would be regarded as a physical hazard.
Legal Hazards – A legal hazard is a rise in the chance of a loss due to legal action – something that would inspire a lawsuit or other means of litigation for your average insurer. For instance, the American legal framework inspires numerous individuals to bring lawsuits, keeping in mind the goal to is get potential large settlements or awards. Anything that may provoke a lawsuit including an insurer is viewed as a legitimate danger.
Moral Hazards – A moral hazard, as the name may suggest, comes about because of fraud committed by an insured person. Examples can incorporate recording false protection claims or distort oneself on a life insurance application with a specific end goal in mind, to get a scope or ideal terms of a range.
Morale Hazards – Not to be mistaken for moral hazards, an insurance hazard comes about because of an absence or an act of negligence. For instance, consider an insurer whose wallet is stolen from their auto because the doors were unlocked, or windows left open. This example would be a hazard of confidence, as the protected did not take the primary care to keep his resources from being stolen.
Moral Hazards Versus Morale Hazards
The distinction between a moral hazard and a morale hazard is the purpose or intent of the insured. A moral hazard emerges out of a person’s intent to scam or betray the insurance company. As compared to a morale hazard, where in insured has a more careless or reckless attitude and exercises less caution to prevent injury, thus increasing the possibility an injury or loss occurs, which comes about because the person does not care about his possessions because he knows he is insured.
Another example of morale hazard is large corporations that take huge risks, and the have the safety net of the US Government (taxpayer dollars) to bail them out if they get in financial trouble – like GM, AIG etc.
Perils in the Insurance Business
Peril, when used in the insurance business, only applies to property insurance. While perils and hazard sound similar, a peril comes about because of a hazard. A hazard just improves the probability of a peril occurring. For instance:
- A rooftop covered with snow can be a physical hazard. On the off chance that the snow is great enough to the point that the rooftop collapses inward, at that point the snow is the peril.
- A fire starts up in an office building, which makes the sprinkler framework initiate. The sprinkler system activating causes extensive water damage. Even though the fire caused the issue (hazard), the water damage itself is the peril.
- Ice on a sidewalk is a hazard, the peril is slipping and getting injured.
Property protection regularly covers a wide range of kinds of perils. In any case, certain perils, (for example, floods or earthquakes) are typically excluded from the scope of standard property coverage because of the absolute measure of destruction they can cause. What is a peril in insurance?, three categories of perils, difference between physical and moral hazard in insurance, types of perils in insurance, peril and hazard ppt, types of hazards in insurance, hazard definition insurance, what are perils?
What Is The Difference Between A Peril And A Hazard? - The Bottom Line
We hope this article on what is the difference between a peril and a hazard? has been informative. If you would like to find out which perils are covered (or excluded) under a property policy, you should contact an experienced insurance broker to help.