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A peril is the immediate, specific event that causes a loss. Each line of insurance covers different perils.
| Insurance Line | Common Perils | Key Points for Exam |
|---|---|---|
| Accident and health insurance | Illnesses, accidents, disease, and disability. | Both sudden and gradual onset conditions can be covered. |
| Life insurance | Death (mortality). | Life insurance protects against premature death. |
| Annuities | Living too long. | Annuities provide protection when death is delayed. |
| Property insurance | Fire, lightning, windstorm, hail, earthquake, vandalism, and theft. | Multiple perils may affect the same property simultaneously. |
| Liability insurance | Negligence, errors/omissions, professional mistakes, third-party claims. | Must involve legal responsibility to others. |
Typically, insurance policies define the perils being protected against in one of two ways: specified (named) perils and special (open) perils.
Insurance contracts that individually cover specified or named perils list those specific perils that they cover. If a loss is caused by a peril that's not listed within the insurance policy, then the loss is not covered. For example, a life insurance policy may specifically name coverage for only accidental death. A health insurance policy may explicitly only cover cancer. A property policy may explicitly cover only losses that are caused by fire and lightning. Again, a named-perils policy identifies the perils it covers. By doing so, a named-peril policy defines the covered losses narrowly.
Special or open peril insurance policies don't name the perils that they cover. Instead, these policies begin by stating that they cover all direct causes of loss, then list the perils they exclude from coverage. Since an open peril policy stipulates the causes of loss that are not covered under the policy, the policy will therefore cover any peril that is not explicitly identified as being excluded from coverage. For example, comprehensive medical insurance and standard life insurance will typically cover medical bills and pay death claims related to perils other than those expressly excluded.
A loss is defined as an unintended and unforeseen reduction or destruction of financial or economic value. In other words, a loss is an unintentional decrease in the value of an asset due to a peril.
Losses can be further classified as either direct losses or indirect losses. Direct losses occur when a person or property is damaged, destroyed, or killed by a peril without any intervening cause. The peril in question is the proximate cause of the direct loss. An indirect loss is also referred to as "Consequential loss" because the loss is a consequence of, or results from, a direct loss. This distinction is most relevant for property and casualty insurance.
A loss can also be defined as either an accident or an occurrence. An accident is an unforeseen, unexpected, unintended, and sudden event that occurs at a specific time and specific place. An occurrence can be any event that causes a loss. Occurrences include accidents, injuries, illnesses, as well as losses that are caused by repeated or continuous exposure to conditions over time.
For example, if an individual needs a knee replacement from being involved in a car accident, there are likely some witnesses who saw the accident and, in theory, could provide the exact time and location of the accident that caused the injury. Now, let's assume the individual needs a knee replacement due to years of intense physical activity. In this case, there are no witnesses who could provide the specific time and location of the occurrence that resulted in the need for the individual's knee replacement.
Every accident is an occurrence, but not every occurrence is an accident.
A hazard increases the possibility that a peril (a cause of a loss) will occur. Examples of hazards include icy roads, driving while intoxicated, and improperly stored toxic waste. There are three types of hazards — physical hazards, moral hazards, and morale hazards. All of these hazards result from conditions relating to the insured. For exam purposes, a person must be able to distinguish between these hazards.
Physical hazards are physical or tangible conditions that exist in a manner that makes a loss more likely to occur. Physical hazards can be seen, touched, tasted, smelled, or tripped over, thereby causing loss. Poor health and ice on roads are examples of physical hazards. For example, a warehouse with faulty electrical wiring is a physical hazard because it's a tangible condition that increases fire risk.
Moral hazards make the loss more likely to occur due to the dishonest character of the insured, who may be more disposed to either engage in criminal activity or cause a loss because of negative habits. The chance of loss increases because of who the insured is. In other words, the chance of loss is greater due to the individual character of the insured. Properly defined, a moral hazard occurs when the insured is more intentional and conscious of participating in wrongdoing that's more likely to lead to a loss. For example, a business owner who disconnects sprinkler systems to save money is exhibiting a moral hazard because it is an intentional action showing dishonest character.
Morale hazards result from the personal or subjective thought process of the insured. In other words, they arise from a state of mind that's related to the indifference of an insured to whatever loss may occur. The insured unintentionally creates a loss situation on an unconscious level. In essence, they just don't care about loss prevention since the property is insured. For example, a homeowner who rarely changes smoke detector batteries is exhibiting a morale hazard, since it reflects a careless attitude due to having insurance.
Physical hazards: Think "can be measured or observed." Moral hazards: Think "intentional and dishonest" (like insurance fraud).
| Type of Hazard | Definition | Life and Health Examples | Key Exam Points |
|---|---|---|---|
| Physical hazards | Physical or tangible conditions that make a loss more likely | Poor health conditions (high blood pressure, obesity), dangerous occupation (mining, construction), hazardous hobbies (skydiving, racing), living in an area with poor air quality, working with toxic materials | Can be seen, measured, or documented through medical exams or records |
| Moral hazards | Dishonest character or intentional behavior that increases chance of loss | Lying on the insurance application, faking medical symptoms for disability benefits, submitting false health insurance claims, intentionally delaying medical treatment to increase claims, concealing preexisting conditions | It always involves dishonesty or intentional acts |
| Morale hazards | Careless attitude or indifference to loss because insurance exists | Skipping preventive medical care because "insurance will pay anyway," not following the prescribed treatment plan, choosing more expensive treatments because insurance covers it, extending hospital stays unnecessarily, neglecting healthy lifestyle choices | Unintentional and stems from carelessness |