Hawaii Insurance License Practice Exam

What is a hazard in insurance terms?

1. A condition which increases the possibility of loss

2. An event that causes accidental damage

3. A specific policy exclusion

4. A contractual duty of the insurer

The correct answer is: A condition which increases the possibility of loss

In insurance terminology, a hazard is defined as a condition that increases the likelihood of a loss occurring. This can include various elements such as physical hazards (e.g., a frayed electrical wire that increases the risk of a fire), moral hazards (e.g., dishonesty that may lead someone to commit insurance fraud), or operational hazards (e.g., inadequate safety measures in an automobile manufacturing plant). Understanding hazards is crucial for insurers as they assess risks and determine policy terms and premiums. Hazards are important to differentiate from other concepts in insurance. For instance, while an event that causes accidental damage refers to a loss incident—potentially falling under the concept of peril—it does not capture the broader implication of risk factors that contribute to such events. A specific policy exclusion denotes coverage limitations in a policy, which addresses what is not covered rather than increasing or decreasing risk. Lastly, a contractual duty of the insurer relates to obligations outlined in the insurance policy, rather than conditions affecting the likelihood of a claim arising. Understanding these distinctions helps clarify the role that hazards play in risk assessment and management within the insurance industry.