How does a hazard differ from a peril?

The correct understanding of the difference between a hazard and a peril is encapsulated in the choice stating that a peril is a potential cause of loss and a hazard increases its likelihood.

In the realm of insurance, a peril refers to an event or circumstance that can cause damage or loss, such as fire, theft, or natural disasters. These are the actual risks that can trigger a claim. On the other hand, a hazard refers to conditions or situations that make the occurrence of a peril more likely or increases the severity of the loss if it does occur. For example, living in an area prone to flooding may serve as a hazard that increases the likelihood of damage (the peril) during a rainstorm.

This distinction is critical because understanding how hazards influence the likelihood of perils helps in the assessment and underwriting of risks in insurance. It also aids in risk management strategies, where the focus may be on reducing hazards to mitigate potential perils. Choices that suggest hazards are causes of loss or that they can be insured against misrepresent these concepts, confusing the nuances of risk assessment and insurance coverage.