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Difficulty: EasyElements of Insurable Risk

A small business owner applies for a commercial insurance policy specifically to cover the potential loss of "employee morale" following a bad financial quarter. According to the elements of an insurable risk, why would an insurance company reject an application for this specific coverage?

  1. The loss of employee morale is subjective and cannot be definitely measured in financial terms.Answer
  2. B
    Low morale represents a speculative risk because the business might still make a profit despite the bad quarter.
  3. C
    Employee morale is considered a covered peril rather than a morale hazard.
  4. D
    The business owner is utilizing risk retention by asking the insurance company to pay for the loss.

Answer

The insurance company would reject the application because the loss of employee morale is subjective and cannot be definitely measured in financial terms.
For a risk to be ideally insurable, the loss must be definite and measurable in financial terms. This allows the insurer to accurately calculate the premium and determine the exact payout in the event of a claim. 'Employee morale' is subjective and abstract, making it impossible to assign an objective dollar value to its loss.

Step-by-Step Solution

1
Identify the proposed risk in the scenario.
The risk is the loss of 'employee morale' following a bad financial quarter.
Understanding the specific nature of the exposure is the first step in underwriting.
2
Evaluate the risk against the elements of an insurable risk.
An insurable risk must be due to chance, definite and measurable, statistically predictable, not catastrophic, and involve a large loss exposure.
Insurance policies require specific criteria to be met so that premiums can be accurately calculated and losses verified.
3
Determine which core element is violated by 'employee morale'.
Employee morale is an abstract concept; a decline in morale cannot be objectively quantified with a specific dollar amount.
To pay a claim, the insurer must be able to definitively measure the exact financial value of the loss.

Key Concept

Elements of Insurable Risk: Definite and Measurable Loss
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Topics

Elements of Insurable Risk

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