Types of Hazards & Fraud

A hazard is an instance, behavior, or condition that increases the chance of incurring a loss or increases the severity of a loss.
Hazards can result from:
- An insured's own actions
- The actions of others
- Physical conditions
Insurers are concerned about the number and type of hazards affecting the items they insure.
More hazards increase the insurer's chance of incurring a loss.

Occur when an insured person consciously and deliberately acts in a way that is more likely to result in a loss.
Involve fraudulent intention.
Example: Leaving a car unlocked in an unsafe neighborhood with the keys in the ignition, hoping it will be stolen for insurance payment.
All conscious acts committed with the hope of defrauding the insurance company are moral hazards.

Occur when someone exhibits riskier behavior and becomes indifferent to losses because they have insurance.
Recklessness is not necessarily intentional.
The comfort given by insurance coverage still results in a change of behavior.
Example: A woman visiting her boyfriend overnight in an area with a high rate of auto theft may feel more comfortable doing so if she has auto insurance.
Klutzy, forgetful people are also examples of morale hazards.

Physical conditions that increase the chance of loss.
All insured items are exposed to a variety of physical hazards ranging from environmental to material, operational, or occupational.
Example: A poorly maintained car presents a physical hazard by increasing the risk for all drivers on the road.
An improperly inflated tire could rupture, or worn-out brakes could fail and cause an accident.

Occur when the chances of loss increase because of legal action.
Examples:
- Laws or regulations that force insurers to provide coverage for risks they would otherwise not cover, such as drug and alcohol addiction.
- The American legal system is sometimes considered a legal hazard because it often favors those who file lawsuits for monetary gain even if they have little or no legitimate cause for a financial claim.
- Loopholes in an insurance company's procedural or regulatory systems can also increase the company's legal hazard.

The act of deliberately perverting, altering, or misrepresenting the truth or willfully deceiving an insurer in order to realize financial gain.
Fraud occurs anytime someone tries to benefit by being dishonest with an insurer.
Examples: Burning down one's own house or reporting jewelry or cars stolen in order to defraud their insurers.
Even exaggerating damages counts as a fraudulent practice.

Involves deliberately planning or faking a loss such as an accident, theft, or fire that is covered by the insurance policy.
One of the most frequently seen examples of hard fraud is the staging of car accidents.

Also known as opportunistic fraud
More common.
Occurs when a policyholder deliberately exaggerates covered damages in the hopes of getting a larger indemnity.

Fraudulent claims cost insurers hundreds of millions of dollars a year.
This, in turn, affects the premiums of honest policyholders as insurers raise their rates to cover their losses.

Moral hazard: An intentional act committed by an insured with the goal of collecting insurance money.
Morale hazard: A reckless, careless, and sometimes unconscious change in behavior, often due to the comfort of insurance protection.
Legal hazards: Increase the chance of loss through legal action.
Physical hazards: Physical conditions that increase the chance of a loss.
Fraud: Any kind of dishonest behavior used to benefit unfairly from an insurance contract.
- Hard fraud: Involves intentionally causing or faking losses.
- Soft fraud: Occurs when people overstate existing losses to increase their insurance payment.