A hazard is defined as a potentially damaging physical event, phenomenon, condition or human activity that may cause the loss of life or injury, property damage, social and economic disruption or environmental degradation. This could affect liability, flood, fire, burglary and explosion. The hazard of a physical nature is more easily resolved then the moral hazard.

A moral hazard is conditions which may increase or create the probability of a claim occurring. A moral hazard is something which exists such as poor housekeeping resulting in unsanitary conditions or not having fire extinguishers. Other examples of moral hazard would include poor management or failing to maintain your property.

A physical hazard is conditions which can increase the chance or create a chance of of a claim such as congested traffic, slippery floors or not having security for your premises. The premium you will pay can have a direct relationship to the level of physical hazard that your building exhibits.

A satisfactory vehicle inspection report for an older vehicle is a method of establishing that the vehicle is sound. Insurance companies require this to determine if the hazard is too great to accept an older vehicle. A right hand drive vehicle can be determined to be physically too hazardous and some companies will not provide Section C (Collision, Comprehensive or Specified Perils) coverage.

An example of a moral hazard directly affecting you is when you have a claim for a small fire loss. The adjuster goes to your home to assess the damage and sees that the home is in a bad state of repair. The housekeeping is poor and there could even be mold developing due to this situation. The adjuster will recommend to the underwriter that this is a highly hazardous risk. Now you have a claim in progress and likely the insurer is going to want to cancel your policy. This will be considered a high-risk situation and your premiums will go up and markets that will take your insurance will be limited. You might not be able to get the same level of coverage as you had in the past.

The same situation for a physical hazard directly affecting you would be if the adjuster attends your home and sees some oily rags stored near the furnace. Perhaps a railing needs to be added to the newly-built deck out back. The adjuster will likely notify the underwriter of his observations and recommendations will be made. You must comply with the recommendations. You may have to provide a picture of the new railing around that deck.

For more information talk to your adviser. Perhaps you want to explore the area of risk management to help you avoid and control risk.