How do physical hazards impact on insurance policies?

When discussing insurance, it is crucial to understand hazards. A hazard is an insurance term that refers to a condition that may increase the possibility of a loss occurring. Hazards, which include both physical hazards and moral hazards, directly impact your policy. Specifically, they impact how much you will pay for home insurance, liability car insurance, and more. Continue reading if you want to better understand how physical hazards work in the insurance industry.

Hazards in the insurance industry

As mentioned, a hazard is a unique condition that can increase the likelihood of a loss or damage occurring. Insurers analyze potential hazards related to a specific policyholder to assess their risk. When assessing a policyholder for hazards, an insurance company will consider how likely they are to make a claim based on the dangers that apply to them.

For instance, a car insurance provider may charge a higher premium to a policyholder who drives a luxury or sports car rather than a budget-friendly family car. This is because sports cars have higher speed capabilities and statistically may be more likely to end up in accidents compared to family cars.

Hazards in insurance refer to the conditions that increase the likelihood of a loss occurring. In other words, hazards are factors that increase the risk of occurrence of an insured event. Insurers use the concept of hazards to assess the risk of a policyholder making a claim and to determine the premium that should be charged.

For example, a car insurance company may charge a higher premium on collision car insurance to a policyholder who drives a sports car than to a policyholder who drives a family car. This is because a sports car is more likely to be involved in an accident than a family car.

Thankfully, there are ways that policyholders can reduce their risk and, therefore, reduce the hazards that apply to them. One such example is installing an anti-theft device in your car or a monitored burglar alarm in your home.

The different types of hazards in insurance explained

There are three main types of hazards that you will come across in the insurance industry: physical hazards, moral hazards, and morale hazards. We explain each below:

Physical hazards

Physical hazards come from the physical conditions of a policyholder’s property or the policyholder themselves. Examples of physical hazards in home insurance include the address or location of the property, the property's materials, the property's safety features, and the property’s susceptibility to loss due to weather or natural disasters.

For example, a physical hazard in home insurance would be a home that is located in an area that frequently experiences wildfires or earthquakes. Some policyholders choose to purchase all perils insurance to be protected against the broadest range of physical hazards.

Moral hazards

Next, moral hazards are hazards that derive from the policyholder’s behaviour, intentions, or ethics. These hazards are less tangible than physical hazards as they involve a person’s intentional actions that may increase the likelihood of loss or damage. A few common types of moral hazards are insurance fraud, intentionally causing damage to receive an insurance payout, or submitting exaggerated or misleading claims.

While moral hazards can be more challenging to detect and identify, it is part of an insurance company’s job to assess all policyholders for this type of behaviour. To reduce the odds of a moral hazard arising, insurance companies often have a large team dedicated to investigating insurance claims to ensure that the damage was sudden and accidental.

Morale hazards

Last but not least is morale hazards. Morale hazards are hazards that relate to the policyholder’s attitude or mindset. Whereas moral hazards are usually intentional, morale hazards typically are not. Instead, these hazards come into play when a policyholder feels bolder and believes that they can take on more risk due to their insurance coverage. For example, a car insurance policyholder deciding to engage in reckless driving because they have accident forgiveness coverage or comprehensive car coverage is an example of a morale hazard.

How hazards impact insurance premiums

Hazards significantly impact insurance premiums since they are all about risk. When assessing a policyholder’s risk, an insurance agent will carefully evaluate what physical, moral, or morale hazards may apply to them. Keep reading for more detailed information on how hazards affect insurance premiums:

Risk assessment

First and foremost, insurance companies will carefully consider all types of hazards to help them determine a policyholder’s overall risk level. When assessing hazards, they won’t only consider those in relation to the policyholder themselves but also in relation to the asset being protected, e.g. a home or car. The higher the policyholder’s perceived risk, the more expensive their premium will be.

Premium amount

The premium amount is a second way that hazards influence insurance. Insurance agents use risk assessments, including hazard assessments, to calculate and set a policyholder’s premium. The more dangers that apply to you, the more at risk you will be of an incident occurring. In turn, the more likely you are to file an insurance claim. As such, policyholders who are at risk of several hazards will usually pay more for insurance.

Policy decisions

Hazards can also impact policy decisions. For example, an insurance company might use hazards as an excuse to refuse someone’s insurance application. Oppositely, they can be used to accept a certain policyholder’s application. However, the hazards that relate to a policyholder will partially determine what terms and conditions the insurance company offers. Policyholders at higher risk of an incident due to hazards might be more likely to have many exclusions on their policies.

The most common examples of insurance hazards

To give you an even better understanding of hazards in the insurance industry, continue reading for a breakdown of common hazards:

Natural disasters

Natural disasters and weather-related events are one of the common types of insurance hazards. Natural disasters are a physical hazard as they can cause severe damage to homes, cars, and other types of personal property. For example, wildfire season in Western Canada can threaten all kinds of policyholders, whether you have home insurance, auto insurance, farm insurance, etc.

Human error

Human error is another common insurance hazard. An example of human error as a hazard is if a doctor with professional liability insurance accidentally makes a mistake while diagnosing a patient, causing bodily harm or injury. Another example of human error might be a construction worker accidentally causing property damage to a house next to the one they are working on. The responsible party would likely need to file a liability claim in both instances. You can learn more about third-party liability car insurance here.

Theft

Theft is another one of the most common types of insurance hazards. This physical hazard can occur almost anywhere in the country, though some neighbourhoods or cities might be more prone to it due to higher crime rates. Theft can apply to home insurance, business insurance, car insurance, and more. That is why one of the most popular types of auto insurance coverage is comprehensive coverage, which protects against theft.

Technological breakdowns

Lastly, technological breakdowns or failure is a standard insurance hazard. In car insurance, a software glitch in a car could cause a self-driving vehicle to get into an accident. Meanwhile, a cyber attack on a business could result in stolen data and other types of damage. Thus, an insurance agent might also assess your risk for technological breakdowns as a business owner or car owner.

Insurance risks vs. perils vs. hazards

You will often hear three related terms thrown around in the insurance industry: risks, perils, and hazards. While they all represent something similar, there are a few key differences between them. At their core, a risk is the potential for a loss, a peril is the cause of a loss, and a hazard is a factor or condition that can increase the likelihood of a loss occurring. We explain insurance risks, perils, and dangers in greater detail below:

Insurance risks

An insurance risk is the most simple of the three. It simply refers to the possibility of a loss or damage. Insurance risks are factors that impact a policyholder's risk level. Risks are usually divided into three categories: personal, property, and legal. Personal risk is the policyholder's risk of injury or death, property risk is the risk of the policyholder’s asset being damaged, and legal risk is the risk of a lawsuit being brought against the policyholder.

Insurance perils

Next, an insurance peril is the direct cause of a loss. For instance, fire is the named peril if a fire damages your car. Thus, insured perils are the specific risks you choose to insure yourself, your home, your car, your pet, or your business against. These perils, which may also be referred to as named perils or covered perils, will be clearly stated in your policy. Perils that are not covered by your policy will be listed in the exclusions or limitations section. A few of the most common types of insured perils are as follows:

• Fire
• Smoke
• Lightning
• Power surges
• Windstorm or hail
• Weight of ice or snow
• Falling or flying objects
• Explosion
• Riot or civil commotion
• Aircraft and other vehicles
• Vandalism
• Theft
• Freezing temperatures
• Volcanic eruption

Insurance hazards

Finally, hazards, which we have discussed above, are factors that can lead to a loss or increase the likelihood of a loss. Living in an area prone to natural disasters or having a swimming pool on your property are examples of physical hazards. Another physical hazard might be having an old electrical or plumbing system, like knob and tube wiring, or living in a home beneath a canopy of old, large trees.

Contact BrokerLink

The BrokerLink team would be happy to explain more about how physical hazards work and what you can do to keep your risk level low. After all, minimizing your risk as a policyholder is crucial if you want to avoid overpaying for insurance. A BrokerLink insurance advisor can give you all kinds of tips on ways that you can lower your car insurance premium, such as by being aware of winter and summer road hazards.

In addition, a BrokerLink insurance advisor will shop around on your behalf to ensure that you find the best rate for your coverage. Whether you are looking for car insurance featuring accident benefits coverage or a standard homeowner’s insurance policy, you can count on us to find you a competitive premium. Get started today by requesting a free auto insurance quote. Insurance quotes can be requested and sent in as little as five minutes. Contact BrokerLink today for your free quote.

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