Moral Hazard

"Moral hazard" is the terminology used in the insurance industry that refers to the temptation on the part of the policy holder to engage in risky behavior or to deliberately take actions designed to result in the collection of insurance benefits. In these instances the individuals not only do not suffer the full consequences of the act in question, but may actually profit from that act.

An example of moral hazard associated with home insurance policies would relate to the intentional infliction of damage on property to perpetrate insurance fraud. For instance, if a home owner has coverage for instances of fires, the moral hazard attached to the policy is the temptation of the policy holder to actually commit an act of arson to collect on the insurance policy.

The temptation to give into moral hazards is the underlying reason for the care with which all insurance claims are investigated before benefits are paid.

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