Moral Hazard

Contestability limits, fraud penalties, claim investigation, and exclusions for intentionally caused losses — Moral hazard is dishonesty that surfaces when insurance exists — fabricated or exaggerated claims, concealment, and intentional self-injury. Insurers and regulators answer with tools that raise the cost of dishonesty: incontestability provisions that give the insurer a limited window to challenge misrepresentation, criminal and civil fraud penalties under California law, careful claim investigation, and exclusions for intentionally caused losses. Each device makes fraud or carelessness expensive for the insured and preserves the integrity of the pool.

National insurance concept

Adverse selection is the tendency of higher-risk individuals to seek more coverage; moral hazard is the tendency of insureds to behave more recklessly or fraudulently because they are covered — Adverse selection (anti-selection) describes what happens at the point of purchase: people who know they present higher risk are more likely to apply for coverage, skewing the pool. Moral hazard describes behavior AFTER coverage exists: insureds may be less careful — or even dishonest — because insurance will absorb the loss. Underwriting, waiting periods, and preexisting-condition clauses address adverse selection, while deductibles, coinsurance, and fraud controls address moral hazard.

National insurance concept