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Difficulty: MediumPerils and Hazards

A dry-cleaning business owner discovers that the main valve for the building's automatic sprinkler system is jammed shut. Because the business carries comprehensive property coverage, the owner decides it is not worth the expense to hire a repair technician, assuming insurance will pay for any damages. A month later, a fire breaks out in the pressing area and causes a total loss because the sprinklers cannot operate. According to risk management principles, which of the following accurately categorizes the elements of this scenario?

  1. The fire is the peril, and the owner's indifference to repairing the valve is a morale hazard.Answer
  2. B
    The fire is the peril, and the owner's indifference to repairing the valve is a moral hazard.
  3. C
    The malfunctioning valve is the peril, and the fire is a physical hazard.
  4. D
    The owner's indifference is the peril, and the malfunctioning valve is a morale hazard.

Answer

The fire is the peril, and the owner's indifference to repairing the valve is a morale hazard.
The correct answer accurately identifies that the fire is the active cause of the loss (the peril). Furthermore, it correctly classifies the owner's careless attitude—choosing not to repair a safety system because the business is insured—as a morale hazard.

Step-by-Step Solution

1
Identify the peril in the scenario.
The peril is the fire.
A peril is defined as the immediate, active cause of a loss. In this scenario, the fire is what actively destroyed the building.
2
Analyze the owner's behavior and the condition of the property.
The owner showed indifference toward a known risk because they were insured.
The jammed valve is a physical hazard, but the owner's deliberate choice not to fix it due to a careless attitude relying on insurance is a morale hazard.
3
Distinguish between moral and morale hazard.
The attitude is a morale hazard, not a moral hazard.
The owner did not intentionally start the fire to defraud the insurer (which would be a moral hazard); rather, the owner was simply careless about maintenance because of the safety net of insurance.

Key Concept

Distinguishing between Perils, Moral Hazards, and Morale Hazards
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Topics

Perils and Hazards

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