Insurance Hazards: What's Covered?

In the context of insurance, a hazard is a factor or activity that may cause or exacerbate a loss. For example, a can of gasoline left outside a house door or a failure to regularly check a car's brakes are hazards. Hazards are divided into three classifications: physical, moral, and morale. Physical hazards are actions, behaviours, or conditions that cause or contribute to peril. Moral hazards are wrongful behaviours or conduct, such as fraudulent claims. Morale hazards are careless or reckless attitudes that can cause peril.

Physical hazards: Actions, behaviours, or conditions that cause or contribute to peril, e.g. smoking, frayed electrical wiring, liquid spills

Physical hazards are actions, behaviours, or conditions that cause or contribute to peril. They are one of the three classifications of hazards, the other two being moral and morale hazards.

Some examples of physical hazards include:

• Smoking: Smoking is a physical hazard as it increases the chance of a fire occurring and increases the probability of severe illness.
• Frayed electrical wiring: Frayed electrical wiring can lead to electrical malfunctions and increase the risk of electrical hazards such as electric shocks or short circuits.
• Liquid spills: Liquid spills can cause electrical malfunctions and increase the risk of electrical hazards.
• Working at high altitudes: Working at high altitudes can increase the risk of accidents or injuries.
• Operating heavy equipment: Operating heavy equipment without proper training or safety measures can lead to accidents or injuries.
• Inadequate insulation: Over time, electrical insulation can deteriorate due to wear and tear, rodents, or exposure to moisture, leading to exposed wires and an increased risk of electric shock.
• Circuit breaker failure: If a circuit breaker fails to trip during an overload, it loses its protective function, increasing the risk of electrical hazards.
• Improper maintenance: Failing to regularly inspect and maintain electrical systems can lead to severe electrical hazards over time.

It is important to identify and address physical hazards to prevent accidents, injuries, and losses. This can include implementing safety measures, providing training and information, and following basic safety rules and procedures.

Moral hazards: Wrongful behaviour or conduct, e.g. fraudulent insurance claims

Moral hazards are a type of hazard that is related to the behaviour and ethics of the insured individual or entity. Moral hazards arise when a person or organisation engages in dishonest, fraudulent, or irresponsible actions that may lead to an increased likelihood of filing insurance claims. Moral hazards are wrongful behaviour or conduct, such as fraudulent insurance claims.

Moral hazards can take many forms. For example, a business owner may deliberately cause damage to their property in order to claim insurance money. This is an example of a moral hazard that involves intentional damage and financial gain. Another example is when individuals or organisations become less vigilant or careless in safeguarding their property after obtaining insurance coverage. This change in behaviour is a result of feeling protected by the insurance policy. For instance, a person might leave their car unlocked or drive recklessly, assuming that the insurance will cover any damages. This type of behaviour can lead to an increased likelihood of losses and, consequently, higher insurance premiums.

Health insurance companies are particularly concerned with moral hazards that lead to fraudulent claims. For example, auto accident victims may invent or exaggerate their injuries to receive higher compensation. The existence of moral hazard in health insurance has led to a growing interest in the economic literature to identify and measure its effects.

The concept of moral hazard in insurance is based on the idea that individuals may act more riskily or carelessly when they believe they are protected by an insurance policy. This behaviour can increase the likelihood of losses and claims, impacting insurance companies financially. As a result, insurance companies often take steps to detect and prevent moral hazards, especially those that can lead to fraudulent claims.

Morale hazards: Careless or reckless attitudes that can cause peril, e.g. a policyholder being less careful about their health or property due to having insurance

In the insurance industry, hazards are divided into three classifications: physical, moral, and morale. While moral hazards refer to wrongful behaviour or conduct, morale hazards refer to careless or reckless attitudes that can cause peril.

Morale hazards are characterised by an indifference to loss, as the insured party knows that their insurance coverage will compensate for any damage or loss incurred. This indifference can lead to a change in behaviour, such as being less careful about one's health or property. For example, a person with health insurance may be less motivated to maintain a healthy lifestyle or seek preventative medical care, knowing that their insurance will cover any health issues that arise. Similarly, a person with property insurance may be less careful about maintaining or protecting their belongings, as they know that their insurance will provide compensation in the event of damage or loss.

The distinction between moral and morale hazards lies in the conscious versus subconscious nature of the behaviour, and the intent of the insured party. While moral hazards involve conscious and intentional behavioural changes to seek personal gain, morale hazards refer to subconscious and unintentional behavioural changes due to a sense of indifference or reduced responsibility.

The existence of insurance coverage can increase the likelihood of morale hazards, as individuals may become less vigilant about safeguarding their health or property. This change in attitude can lead to increased frequency or severity of losses, as the insured party may not take the necessary precautions to prevent them.

It is important to note that morale hazards do not reflect on the character or integrity of the insured individual but rather on their attitude towards risk and loss. Underwriters may face challenges in assessing morale hazards due to the unpredictable nature of behavioural changes.

Biological hazards: Bacteria, viruses, insects, plants, birds, animals, and humans

Biological hazards, also known as biohazards, are caused by animals, plants, or microbes such as bacteria and viruses, all of which can have an impact on human health. They can be encountered anywhere, including at home, at school, and in the workplace.

In the context of insurance, biological hazards are considered when assessing risks and potential liabilities. Bacteria, viruses, insects, plants, birds, animals, and humans can all be sources of biological hazards, leading to a range of health issues. These issues can vary from mild skin irritation and allergies to severe infections and even life-threatening illnesses. For example, ticks, which can be carried by animals or found in nature, can transmit Lyme disease. Similarly, poison ivy, commonly found in forests, can cause skin irritation and allergies.

Viruses transmitted by insects, such as the Zika virus, pose a significant risk, especially to those working outdoors or in laboratories. Other viral infections, like influenza, can be easily spread from person to person, causing flu-like symptoms. Bacterial infections, including tuberculosis and Legionnaires' disease, can also have serious health consequences.

Fungi, including certain types of mould, can also be classified as biological hazards. These can be found in natural and built environments, such as water-based aerosols and air conditioning cooling towers, and can lead to respiratory issues and infections.

Additionally, humans can be a source of biological hazards, transmitting viruses and bacteria through direct contact or by touching surfaces. This is particularly relevant in healthcare settings, where employees are at risk of exposure to bloodborne pathogens, including HIV and hepatitis.

To mitigate these risks, it is essential to implement precautionary measures and comprehensive risk assessments, especially in workplace settings. Employers have a responsibility to educate their employees about biological hazards, potential risks, and proactive exposure management.

Chemical hazards: Dependent on the physical, chemical, and toxic properties of the substance

In insurance, a hazard is a factor or activity that may cause or exacerbate a loss. Hazards are divided into three classifications: physical, moral, and morale.

Physical hazards are actions, behaviours, or conditions that cause or contribute to peril. For example, smoking is considered a physical hazard because it increases the chance of a fire occurring.

Chemical hazards are a type of physical hazard that can cause a wide range of health and physical hazards. These include irritation, sensitization, carcinogenicity, flammability, corrosion, and explosibility.

The physical hazards of a chemical include its flammability and reactivity. Flammability is the tendency of a chemical to burn. The flashpoint, auto-ignition temperature, and flammable limits of the material may be found in the Safety Data Sheet (SDS), and are helpful in assessing the potential for a fire hazard under specified conditions.

Reactivity is the potential of the material to explode or react violently with air, water, or other substances upon contact. This information can also be found in the SDS, in the Stability and Reactivity Data section.

The health effects of hazardous chemicals are often less clear than the physical hazards, and data on the health effects of chemical exposure, especially from chronic exposure, are often incomplete. Toxicity and hazard are two terms that are often used interchangeably, but their meanings are quite different. Toxicity is the ability of a chemical substance to cause harm, while hazard is the likelihood that a material will cause harm under the conditions of use. Therefore, even highly toxic chemicals can be used safely with proper handling. Conversely, less toxic chemicals can be extremely hazardous if handled improperly.

The actual health risk of a chemical depends on its toxicity and the actual exposure. An assessment of the chemical's toxicity and the possible routes of entry will help determine what protective measures should be taken. The simplest way for chemicals to enter the body is through direct contact with the skin or eyes, or by inhalation.

Employers are required to identify and evaluate the respiratory hazard(s) in their workplaces. Various types of Occupational Exposure Limits (OELs) have been established by a number of organizations, and these are listed on many of the Occupational Safety and Health Administration's (OSHA) Safety and Health webpages on chemical hazards and toxic substances.

Overall, chemical hazards pose a wide range of health and physical risks, and it is important for employers and employees to be aware of these risks and take appropriate precautions to ensure safety in the workplace.

Frequently asked questions