Underwriting Against Moral Hazards
Policy provisions can be used to control the risk of the moral hazard, without refusing the risk in its entirety. Built-in provisions of the policies like the “fraud and misrepresentation” conditions work to deter losses by persons with a moral hazard. The standard fire policy, and most first party policies, provide that the entire policy is void if the applicant commits fraud in securing the insurance or if the insured willfully misrepresents or conceals any material fact or circumstance concerning insurance. If the policy is a marine policy the insured is required to volunteer material information. With other types of insurance the onus is on the insurer to ask the right questions. Failure to ask can compel an insurer to stay on a risk it would never have taken if it knew the truth.
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