Alabama Personal Lines Practice Exam

The correct answer identifies planning to commit a loss in order to collect on an insurance policy as a moral hazard. This concept revolves around the behavior of individuals who may take undue risks or engage in dishonest actions when they believe they are protected by insurance. In this scenario, the insured might intentionally create a loss, reflecting a lack of integrity and an ethical disregard, which highlights the essence of moral hazard. Moral hazards arise when the presence of insurance reduces the insured party's incentive to avoid risky behavior, as they know they will not bear the full consequences of their actions. This contrasts with other types of hazards, such as physical hazards, which involve tangible conditions that may increase the likelihood of a loss; legal hazards, relating to the complexities or ambiguities in laws and regulations that can affect claims; and economic hazards, associated with financial conditions that might lead to a loss. Understanding moral hazards is crucial for insurers to evaluate risk and devise strategies to mitigate potential fraudulent claims.