Texas Property and Casualty License Practice Exam

What is an example of a moral hazard?

1. A dead tree that could fall on a property

2. Someone intentionally causing a loss

3. Attitude of carelessness towards safety

4. A natural disaster

The correct answer is: Someone intentionally causing a loss

A moral hazard occurs when a party engages in riskier behavior or takes greater risks because they do not bear the full consequences of their actions, often due to insurance coverage. In this context, intentionally causing a loss exemplifies a moral hazard, as an individual might exploit their insurance policy by committing fraud or damage. This behavior can lead to increased costs for insurers and ultimately affects all policyholders due to higher premiums resulting from such actions. The other scenarios highlight different types of risks or hazards. For instance, a dead tree that could fall on a property is a physical hazard, while the attitude of carelessness towards safety reflects a behavioral risk but does not directly involve the opportunistic element present in moral hazards. A natural disaster, likewise, poses a risk but is an uncontrollable external event rather than a product of intentional or negligent behavior by an insured party.