A condition or circumstance that increases the likelihood or severity of a loss is called a:
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
A hazard is any condition, situation, or circumstance that increases the likelihood or potential severity of a loss. Hazards come in three recognized forms: physical hazards are tangible conditions such as worn wiring; moral hazards arise from dishonesty, such as an owner who would stage a loss; and morale hazards are carelessness encouraged by the existence of insurance, such as failing to lock doors after buying theft coverage. Identifying hazards is an underwriting function, because hazards help the insurer predict which risks are more likely to produce claims and therefore deserve a higher premium or stricter terms.
Why the other options are wrong
- B) A peril is the actual cause of a loss, such as fire, wind, or theft — the event itself that damages the insured; it is not a condition that merely makes a loss more likely to occur.
- C) The premium is the price the insured pays in exchange for coverage and is calculated from the risk factors present; it is a payment, not a condition that influences the likelihood or severity of loss.
- D) A rider is a written amendment attached to a policy that adds, deletes, or changes provisions of the base contract; it has nothing to do with conditions that increase the probability of a loss.
Memory hook
Hazard is the hidden factor that makes a peril more dangerous; peril is the event itself.