A jewelry boutique owner is experiencing severe financial difficulties. Hoping to collect an insurance payout to avoid bankruptcy, the owner intentionally disables the store's alarm system and leaves the rear loading door completely unlocked overnight. A thief discovers the unlocked door, enters the premises, and steals a significant portion of the inventory. Based on insurance principles, how are the specific elements of this loss accurately classified?
- The theft is the peril, and the owner's intentional actions to facilitate the loss constitute a moral hazard.Answer
- BThe theft is the peril, and the owner's failure to secure the premises constitutes a morale hazard.
- CThe disabled alarm system is the peril, and the financial difficulty motivating the owner constitutes a morale hazard.
- DThe unlocked door is the peril, and the resulting theft of the inventory constitutes a physical hazard.
Answer
The theft is the active cause of the loss (peril), and the deliberate, financially motivated actions by the owner represent a moral hazard.
In insurance, a peril is the direct, active cause of a loss, which in this scenario is the theft of the inventory. A hazard is a condition that increases the likelihood or severity of that loss. Because the owner intentionally disabled security measures with a dishonest motive to defraud the insurance company and collect a payout, this represents a moral hazard. It goes beyond a physical defect (physical hazard) or mere carelessness (morale hazard).
Step-by-Step Solution
Key Concept
Distinguishing between Perils (the cause of loss) and Hazards (conditions increasing the chance of loss), specifically Moral Hazards (dishonesty/fraud).