South Carolina Personal Lines Practice Exam

When an insurer finds that an applicant had submitted a fraudulent claim in the past, what type of hazard does this represent?

1. Moral

2. Physical

3. Legal

4. Social

The correct answer is: Moral

When an insurer discovers that an applicant has submitted a fraudulent claim in the past, this situation is identified as a moral hazard. Moral hazards arise from the behavior and ethical considerations of individuals or entities that may lead to increased risk for insurers. In this case, the act of submitting a fraudulent claim indicates a disposition toward dishonesty and an intention to exploit the insurance system for personal gain. This differs from physical hazards, which are tangible conditions that increase the likelihood of loss, such as a hazardous environment or risky property conditions. Legal hazards pertain to the risks arising from legal actions or liability issues, while social hazards relate to societal factors that influence the behavior of individuals within a community. Thus, the context of a past fraudulent claim clearly aligns with the concept of moral hazard, underscoring the ethical implications of the applicant's actions.