What is an example of a moral hazard?

An example of a moral hazard involves a situation where an individual takes higher risks because they do not bear the full consequences of those actions, particularly when they stand to gain financially from actions that might be unethical or directly harmful to others. Deliberately causing damage to property for the sake of gaining an insurance payout exemplifies such behavior, as it demonstrates a willingness to take advantage of the insurance system for personal gain.

This kind of moral hazard arises because the insured party feels less motivated to avoid risk when they know that the insurance will cover the costs of their loss or damage. This contrasts with the other scenarios presented, where the actions do not intentionally exploit the insurance system for profit. Accidentally damaging property and negligently causing an injury indicate a lack of intention or forethought about the consequences. Failing to disclose existing health conditions, while potentially problematic in terms of insurance validity, does not exhibit the same level of intentional wrongdoing as causing damage expressly to receive an insurance benefit.