Question

Insurers have many reasons for excluding coverage for certain perils and property items. Indicate the reason the insurer might have for excluding each of the following losses:

a) Wear and tear - Lack of suddenness
b) Flood damage - High-risk exposure
c) Nuclear incidents - Catastrophic potential
d) Intentional acts - Moral hazard

Answer 1

Insurance exclusions for wear and tear, flood damage, nuclear incidents, and intentional acts are based on the lack of suddenness, high-risk exposure, catastrophic potential, and moral hazard, respectively. These characteristics make certain risks uninsurable within standard private insurance policies.

Step-by-step explanation:

Insurers may exclude certain perils and property items for various reasons related to the characteristics of the risk involved:

• Wear and tear: This is typically not covered because it lacks the suddenness that is a characteristic of insurable events. Insurance is designed to cover unexpected losses, not the gradual deterioration of an item over time.
• Flood damage: It often carries a high-risk exposure due to the potential for widespread and significant damage. To manage this risk, insurers may exclude flood damage or offer it separately, often through government-backed programs.
• Nuclear incidents: They are excluded due to their catastrophic potential. The scale of potential damage from such incidents is beyond the capacity of private insurers, thus, coverage for nuclear risks is often handled at the national level.
• Intentional acts: These are excluded as they present a moral hazard. Insurance is meant to cover accidents and unforeseen events, not deliberate actions taken by the insured that could lead to a claim.