An insured who has comprehensive medical coverage deliberately exaggerates the value of medical expenses on a claim form. This conduct is best classified as a:

Why A is correct

A moral hazard is an increase in the chance or severity of loss caused by dishonesty — deliberately exaggerating a claim or staging a loss. Because the insured has coverage, the temptation to profit from the policy arises. Moral hazards are the reason insurers investigate suspicious claims and why California requires fraud warnings on claim forms.

Why the other options are wrong

• B) A morale hazard is carelessness or indifference that develops because insurance exists — such as neglecting preventive care — not intentional dishonesty.
• C) A physical hazard is a tangible condition, such as faulty wiring, that increases the chance of loss; no physical condition is involved here.
• D) Pure risk refers to a type of risk (only the chance of loss), not to conduct that increases the likelihood of a loss.

Memory hook

Moral = a thief with a pen. Morale = too lazy to lock the door. Physical = a fire hazard you can touch.