In insurance terminology, what is the difference between "peril" and "hazard"?

The distinction between "peril" and "hazard" in insurance is essential for understanding how policies are structured and the risks they cover.

Peril is defined as a specific risk or event that is covered under an insurance policy which can cause a loss. Examples of perils include fire, theft, and natural disasters like floods or earthquakes. The role of peril in insurance is critical because it delineates what events the insurer is willing to provide coverage against.

On the other hand, a hazard refers to conditions or situations that increase the probability of a peril occurring or the severity of potential losses. Hazards can be physical, such as an old electrical wiring system in a house that increases the risk of fire, or they can be moral, reflecting the character or behavior of individuals that may increase a chance of loss.

Understanding the difference between these terms is crucial for evaluating risk and creating effective risk management strategies in insurance. Recognizing that perils represent direct risks covered by a policy and hazards represent conditions that may amplify those risks enables insurers and insured parties to better assess and address the chances of loss.