Plain version: the peril is what causes the loss; the hazard is what makes a loss more likely or worse. Grease building up in a restaurant's exhaust hood is a hazard. The fire it feeds is the peril. The burned kitchen is the loss.
Definitions:
- Peril: the cause of a loss, such as fire, windstorm, or theft.
- Hazard: a condition that increases the chance or severity of a loss, such as oily rags stored near a heater.
The most common mistake is to treat a hazard and a peril as the same thing.
The four kinds of hazard:
Physical hazard: a tangible condition, such as frayed wiring behind a wall in an old warehouse.
Moral hazard: dishonesty. The insured deliberately causes or inflates a loss, or lies on a claim form.
Morale hazard: carelessness or indifference because insurance exists, such as leaving the car keys inside an unlocked car or leaving candles burning unattended. There is no intent to cause a loss.
Legal hazard: comes from the legal environment, such as a court system known for unusually large damage awards.
Moral vs. morale is tested most. Moral = intent (dishonest). Morale = attitude (careless). California also bars recovery for a deliberate loss: under Ins. Code §533, an insurer is not liable for a loss caused by the wilful act of the insured.