What Are The Moral And Physical Hazards Involved In Fire Insurance

The basic definition of a hazard is a condition that increases the chance of loss in insured risk. A hazard can be any action, condition, circumstance, or situation that makes a peril more likely to occur or a loss more likely to be suffered. Fire insurance is vital as it shields a property against various losses and damages. The property owner receives the correct value of compensation to cover the costs of damage incurred.

To begin with basics there are two elements to hazard that an insurer needs to carefully consider, that is:

1. Moral hazard

2. Physical hazard

Moral Hazards

• These hazards are concerned with the attitude and conduct of people. Those dangers which relate to character, integrity and mental attitude of the insured are included here.

• They are losses that result when a party gets involved in a risky situation or ignores safety measures.

• Insurance companies pay special attention to such cases as they suffer losses due to such incidents where people know that they are safeguarded against the risk and there is the other party who will incur all the losses.

• Such hazards are at times invisible and cannot be identified by mere inspection of the risk or subject of insurance by the insurance surveyor and loss assessor.

Physical Hazards

• Any physical condition that increases the possibility of peril is referred to as a physical hazard in fire insurance.

• These can comprise any material, structural, or operational features of the business.

• The insurance company must have the proper knowledge of the physical hazard while underwriting the policy and deciding whether to accept the risk.

• The insurance terms, rates, nature, premium and other conditions for the fire insurance policy is decided with more ease.

The physical hazards that are included in fire insurance are:

• Nature of the material used in the construction:

The physical hazards, in this case, are the material used in construction and their nature – combustible or non-combustible.

• The lighting and the heating system used:

Fire can be caused inside a building due to the material of the wires and the cable of the building. Therefore, keeping these essential elements in good shape must always be a priority.

• Dirty premises:

The scrap scattered around the premises can trigger the fire accidents. The scrap can also contain hazardous materials that might cause a fire.

• Smoking on the premises:

Inflammable materials should never be brought anywhere near smoking premises.

Extra care needs to be taken in the factories working with combustible materials of any sort. Smoking at such places becomes a physical hazard.

• Nature of business:

Businesses that are involved in the usage of petroleum, kerosene or chemicals, have an increased probability of a fire accident. All combustible materials are considered as physical hazards in fire insurance.

• Nature of the nearby premises:

Fire can easily spread from one building to the building of the insured.

The nature, construction and the occupation of such premises are also considered as physical hazards.

• The distinction between Physical and Moral Hazards:

1. Physical hazard relates to the subject of insurance. On the other hand moral hazard relates to the character, integrity and mental attitude of the insured.

2. A physical hazard is visible to the eyes, can be assessed and rated accordingly. Moral hazards are invisible and hard to assess.

Rakesh Narula & Co. is a reputed name providing techno-commercial services as a consultant, insurance surveyor and loss assessor for the valuation of the property. We also act as an independent engineer for the techno-economic viability studies. Contact us now for more details.