Texas Surplus Lines Practice Test 2025 - Free Surplus Lines Exam Practice Questions and Study Guide

Moral hazards refer to the risk of loss that arises from the behavior and characteristics of individuals. This type of hazard increases the likelihood of a loss due to a person's actions, decisions, or intent. For example, an insured person who has a tendency to behave recklessly or neglect their responsibilities may increase the chances of a loss occurring.

In insurance, moral hazards are particularly important because they can directly impact how policyholders manage their risks and the likelihood of claims being made. Insurers often look closely at the character and habits of individuals when underwriting policies, as these traits can significantly affect the risk profile of the insured.

In contrast, physical hazards relate to tangible, identifiable conditions that can affect loss, such as a building's structure or its location in a flood zone. Legal hazards pertain to the effects of legal actions or regulations that might influence risk. Economic hazards involve the broader financial environment or market conditions that can impact the value of insured property or the ability to recover losses. These types of hazards do not focus on individual traits in the same way that moral hazards do.