What does a moral hazard indicate about an insured individual?

A moral hazard indicates that an insured individual may engage in dishonest behavior regarding claims. This concept arises when the presence of insurance coverage influences the behavior of the insured. When someone knows that they have insurance to cover potential losses, they might take more risks or be less diligent in protecting their property because they believe they will be compensated for any resulting damages or losses. This behavior can lead to fraudulent claims where an individual might exaggerate or fabricate a loss to receive a greater payout from their insurance policy. Recognizing this tendency is critical for adjusters when assessing claims and evaluating the legitimacy of claims submitted by insured individuals.