The Insurance Buying Guide: Moral Hazards and Morale Hazards

An insurance company will also try to determine whether or not you present a moral hazard or a morale hazard -- that is, whether you behave in a way or have chosen a lifestyle that suggests you might have claims problems or that invites disability risks.

A person who presents a moral hazard might be the type who would file a fraudulent disability claim in times of financial distress. The old insurance industry saying pain doesn't show up on an X-ray gets to the issue of moral hazard. A disability policyholder could claim a whiplash neck injury as the result of a relatively minor auto accident -- when, in fact, he is not disabled. Any tendency to use the disability income policy wrongfully is an example of a moral hazard.

In determining whether you pose a moral hazard, the insurance company will look to see if you've had your driver's license suspended or revoked, or if you have a history of substance abuse or a record of criminal activities.

In addition to moral hazards, a disability insurance company also will try to avoid insuring any morale hazards. A morale hazard is an indifferent attitude displayed by a person that increases the risk of loss. From an insurance company's point of view, a person who regularly receives speeding tickets might be demonstrating an indifferent attitude toward the risk of injury due to high speeds.

Again, the policy application is the main mechanism by which a company evaluates moral or morale hazards. If the company does conclude that you pose either of these additional risks, it will add a surcharge to the disability premium or -- more likely -- decline the application.