After purchasing a disability income policy, an insured becomes less diligent about following medical advice and postpones treatment because the insurance will pay anyway. This conduct is best described as:

Why A is correct

A morale hazard is carelessness or indifference that arises because insurance protection exists. This insured is not being dishonest; he is simply less careful because he knows the policy will soften the financial blow of a claim. Morale hazards are a cost of insurance that underwriters attempt to anticipate when pricing a risk. This conduct is distinct from a moral hazard, which involves deliberate dishonesty, and from a physical hazard, which is a tangible condition that increases the chance of loss.

Why the other options are wrong

• B) A moral hazard involves intentional fraud or dishonesty, such as faking a claim or inflating symptoms; mere carelessness is not a moral hazard.
• C) A physical hazard is a tangible condition, such as a hazardous workplace or a physical ailment.
• D) A peril is the event that causes a loss, not an attitude or a behavior.

Memory hook

Morale means who cares; moral means mendacious scheming behind the scenes.