Final answer:
An agent's self-interest causing a conflict with the customer's best interests during insurance sales is known as a conflict of interest. Such conflicts can lead to adverse selection and potentially create a moral hazard situation where insured individuals engage in riskier behavior.
Step-by-step explanation:
A situation that arises during the sale of insurance coverage to a customer in which an agent's self-interest interferes with their obligation to act in the best interests of the customer is called a conflict of interest. This can occur when agents may benefit from selling a policy that is not necessarily the best fit for the customer, possibly due to higher commissions or other incentives. To avoid such scenarios, many industries have regulations and ethical guidelines in place. If unchecked, a conflict of interest could lead to adverse selection, where an insurance company may end up with a pool of high-risk clients because those at lower risk opt out of coverage due to the high premiums set to cover the riskier clients. This could further result in a market failure known as moral hazard, where individuals change their behavior and take on riskier actions because they are insured and less concerned about the consequences.