Moral hazard may not be a term you are familiar with, however it affects all of us. According to the Fundamentals of Risk and Insurance, the Eighth Edition, moral hazard is defined as a "dishonest predisposition on the part of an insured that increase the chance of a loss." Moral hazard claims causes your auto and homeowners insurance rates to increase.

You have heard of individuals who fake a disability or burn their homes down. These are examples of moral hazard. About once a year, you see these people hauled off to court. By the end of the trial those individuals who tried to defraud the insurance company, may not be happy with the end result of the lawsuit against them.

Why is moral hazard so bad, you ask? Well it takes money or resources that may be used to make whole those who have suffered an actual loss. Your insurance company has operating expenses and has to keep money in their reserve as required by law. But individuals who commit fraud, causes your auto and homeowners insurance policy to increase. A $150,000 home that is burned on purpose, costs all of us. The insurance company will pay the claim on behalf of the bank, who the loan is with, and then turn around and sue you. Frivolous claims increase the insurance companies' claims ratio, and this is one of the main reasons people are seeing major increases in their homeowners insurance policies. Your insurance company passes the loss to you through rate increases because of the fraudulent claims, which have upset their actuary estimates of losses.

No one actually wins when a moral hazard is committed. You might get away with destroying your auto or home, but in the end when your rates go up, remember you were part of the cause and not the solution. Collectively we should understand that insurance is there to protect our items, income, and health, while making frivolous claims hurts us all.

Disclaimer: Always consult a financial profession to determine what coverage is right for you.

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