Question

An insured has her property covered under an "open peril" cause of loss form. She experiences a loss. The burden of proof that the peril that was the actual cause of loss in the claim, lies with:

Answer 1

The burden of proof in the event of a loss under an open peril insurance policy falls on the insured, meaning they have to show that the loss was due to a covered peril. Insurance works on the principle of imperfect information and sharing of risk, with premiums set based on estimated risks and benefits.

Step-by-step explanation:

When an insured has her property covered under an "open peril" cause of loss form, and experiences a loss, the burden of proof lies with the insured. This means that the property owner must demonstrate that the loss was due to a peril covered by the policy. Insurance policies inherently involve dealing with imperfect information, as predicting future events with certainty is not possible.

For instance, insurance companies find it challenging to estimate risks accurately due to variability in individual characteristics and behaviors. The insurance mechanism is fundamentally about sharing risk, and the premiums paid are based on the estimated average amount of risks and benefits within a group.

However, a moral hazard can emerge as those insured may take fewer precautions against risks since they have coverage.