What Is The Meaning Of Hazard And Peril In Insurance And Why It Is Different With The Risk?

Before we go to the meaning of hazard and peril, there is something you need to know. In general, the terms peril and hazard are not commonly used interchangeably with each other in terms of risk. Therefore, it is important to know the difference between these terms.

Meaning of Hazard and Peril

The following is the notion of peril and hazard so that it can give you knowledge about the difference between the two.

Peril

Anything that causes a loss is called a peril. Some examples of such peril include theft, earthquakes, hurricanes, floods and so on. Each of these events can lead to the loss.

windstorm is an example of peril

Photo by vintage_queen

Hazard

A peril can cause conditions that can increase losses. In insurance, they call the situation with the term hazard. But, something may be said to be a peril and a hazard.

For example, an outbreak of illness can cause major economic losses. However, the outbreak of the disease is also a hazard that could increase the likelihood of loss from the peril of early death.

3 Types of Hazard In General

Basically, this hazard is divided into three types namely physical, moral, and morale.

1. Physical hazard

A physical hazard is a variety of physical properties that can add value to losses caused by various kinds of peril. Some examples of physical hazards that potentially increase the loss from the peril of fire are the type of residence, the area where the property is located and also the occupancy within the building.

2. Moral hazard

When an insurance owner takes dishonest action or cheats insurance companies then the probability of losses can increase. This includes manipulating losses with the aim of expecting the insurer to compensate for a larger nominal.

Fraud is a big problem for insurance companies because it can increase losses significantly.

3. Morale hazard

Morale and moral hazard at first glance seem like the same. So do not let this bother you. Morale hazard occurs when a person takes an action to increase the loss because he is not satisfied with the losses to be paid by the insurance.

This is not because the person is being dishonest. Some insurance owners may have a careless attitude when preventing loss or even they have different attitudes toward the costs of recovering the damage.People who do not have insurance may also have this attitude.

For example, if there is a medical or physician to provide medical expenses that are more expensive than they should. This is a morale hazard. In other words, morale hazard aims to increase and exacerbate losses when insurers already cover such losses.

Actually, there are other types known as the legal hazard. This type will increase the frequency and severity of loss due to legal doctrine. Where this doctrine is the result of a court decision and then established by law by the legislature.

Jurisdiction, when the legal doctrine supports the plaintiffs represent a hazard to individuals or organizations that sued for the loss. However, this hazard can also occur in the case of property. Although the greatest potential lies in the field of legal liability.

An example is when a building does not meet development requirements in accordance with applicable law in the region. So the building must be destroyed. Of course, this causes a loss for the owners of the building because they have to spend more on reconstruction. Thus the loss will increase.

Thus the explanation of the meaning of hazard and peril in insurance and now you know that both are different from risks. Hopefully can provide benefits and knowledge for you.

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