Property and Casualty Insurance Practice Exam

What type of hazard arises from the condition, occupancy, or use of a property?

1. Moral hazard

2. Physical hazard

3. Morale hazard

4. Legal hazard

The correct answer is: Physical hazard

The correct answer is physical hazard. A physical hazard refers to tangible conditions or characteristics of a property that can lead to an increase in the likelihood or severity of a loss. This may include aspects such as the physical state of a structure (e.g., old wiring that could cause electrical fires), the location of the property (e.g., being in a flood-prone area), or the use of materials that pose greater risks (e.g., flammable materials stored improperly). Moral hazard involves the behavioral aspect of risk-taking where an insured party may act less cautiously because they do not bear the full consequences of their actions, typically after obtaining insurance. Morale hazard, while similar, refers to a state of mind or indifference toward loss prevention due to the presence of insurance, such as neglecting to lock doors because one has coverage against theft. Legal hazard pertains to the potential for loss resulting from legal actions or regulations, impacting claims and coverage. Thus, physical hazards are specifically concerned with the inherent characteristics of the property itself, establishing it as the correct choice in this context.