A term used to describe a subjective hazard that tends to increase the probable
frequency or severity of loss due to an insured peril. Moral hazard is measured
by the character of the insured and the circumstances surrounding the subject
of the insurance, especially the extent of potential loss or gain to the insured
in case of loss. For example, insurance on a thriving business is not subject
to a moral hazard to as great an extent as insurance on an unprofitable business.
On the other hand, an insured with high moral standards may pose less of a moral
hazard even with an unprofitable business than an insured with low moral standards.
Moral hazards are considered when underwriting insurance, particularly fire
insurance, and are addressed by certain policy exclusions. For example,
underwriters are hesitant to insure vacant and unoccupied buildings because
of the possibility that an insured will be tempted to intentionally start a
fire to obtain an insurance recovery.