Final answer:
A named peril policy is an insurance policy that lists specific perils that are covered and does not cover perils that are not listed. Understanding the specific nature of different types of policies, including the potential for moral hazard within insurance practices, is essential.
Step-by-step explanation:
Insurance is a system designed to help individuals and firms mitigate financial losses through a process of shared risk. Policyholders make regular premium payments to an insurance company. In turn, that company promises to pay out to those policyholders who suffer a loss from a covered event. A named peril policy specifically falls under option (c) of the student's question: it is an insurance policy that lists perils that are covered. This means that if a peril (a cause of loss) is not listed in the policy, then it is not covered.
It is important to understand this concept, as it is distinct from other types of policies such as 'all risks' policies which generally cover all perils except those specifically excluded. Known perils typically include events like fire, theft, and natural disasters, among others. This specificity can limit the coverage but also tailor it to the policyholder's needs and potentially lower the premium costs.
The concept of moral hazard is also relevant here. When insured, people might behave differently than if they bore the full risk of loss on their own. For instance, owning a policy may decrease an individual's incentive to take precautions against the risk of a peril occurring, because some financial recovery from the insurance company is expected if the peril happens.