Rhode Island Insurance Adjuster Exam 2025 – The Complete All-in-One Guide to Exam Success!

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What is described as a situation where one party takes risks knowing they are insured for a loss?

Inherent vice

Moral hazard

The situation where one party takes risks knowing they are insured for a loss is identified as moral hazard. This concept refers to the tendency of individuals to take on more risks because they believe they are protected from the consequences of those risks by insurance coverage. Essentially, when a person is insulated from potential losses, their behavior may change, leading them to engage in riskier actions than they would otherwise consider if they were fully responsible for the financial outcome of their decisions.

Understanding moral hazard is crucial as it emphasizes the behavioral aspect of insurance and risk management. Insurers often take this into account when assessing policies and determining premiums, as a higher likelihood of risky behavior can lead to increased claims.

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Ordinary peril

Physical hazard

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