Moral Hazard in Home Insurance: Definition and Examples
Moral hazard in home insurance happens when a homeowner behaves irresponsibly, like not locking their doors to prevent theft, because they assume their insurer will cover any damages.
Background working with banks and insurance companies
Sarah enjoys helping people find smarter ways to spend their money. She covers auto financing, banking, credit cards, credit health, insurance, and personal loans.
Sara Getman is an Associate Editor at Insurify and has been with the company since 2022. Prior to joining Insurify, Sara completed her undergraduate degree in English Literature at Simmons University in Boston. At Simmons, she was the Editor-in-Chief for Sidelines Magazine (a literary and art publication), and wrote creative non-fiction.
Outside of work, Sara is an avid reader, and loves yoga and knitting.
David Marlett is the Managing Director of the Brantley Risk and Insurance Center. He is a professor in the Department of Finance, Banking, and Insurance at Appalachian State University and holds the IIANC Distinguished Professorship. David also serves on the Board of Directors for the Invest program and previously chaired the Loman Advisory Committee for the CPCU Society.
David has taught courses in Risk Management and Insurance for the last 25 years, starting at Florida State University while in the doctoral program. Prior to graduate school, David worked as a commercial lines underwriter for USF&G in Tampa.
He serves as a resource on insurance issues and is a frequent media contributor. He has been quoted by a wide range of outlets, including The New York Times, CNN, Reuters, and NPR.
David has been reviewing articles for Insurify since March 2025.
Updated
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Moral hazard in homeowners insurance occurs when homeowners engage in risky behavior, assuming their insurer will cover damages. The behavior happens after coverage starts and usually isn’t intentional, but it can still affect insurance rates or deductible amounts.[1]
For example, you may forget to replace the batteries in your smoke detector. While mostly harmless, if there’s a fire, it could cause more damage since you’re not alerted to it as soon as it starts, which in turn makes the claim bigger.
Here’s what you should know about moral hazard in home insurance and how insurers take steps to encourage responsible homeownership and reduce the likelihood of claims.
What is a moral hazard in insurance?
Moral hazard in the insurance industry is when policyholders act less carefully because they have insurance. It commonly occurs in home insurance and car insurance but can happen with most types of insurance. Unlike insurance fraud, this behavior occurs after coverage begins and typically isn’t intentional.[2]
For example, you may not be overly concerned about locking doors, since you know your policy offers theft protection and you live in a safe area. In many cases, insurers will cover the resulting damage or loss, but it often makes insurance more costly in the long run.
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Why moral hazard matters in home insurance
Moral hazard matters in home insurance because it increases the financial burden that insurers carry. Uninsured homeowners are fully responsible for any damage and may take extra precautions to avoid damage. But once they have insurance and a financial safety net, they may not be quite as vigilant.
Careless behaviors, like leaving candles burning or skipping important home maintenance, can lead to damage. While preventable in many cases, the insurer may still cover a claim.
This can affect your individual rates and deductibles. But increases in moral hazard claims also shift greater risk for financial loss to insurers, requiring higher policy rates for everyone to offset costs.[3]
Common examples of moral hazard in home insurance
Some common examples of moral hazard in home insurance include:
Skipping home maintenance
Failure to do routine home maintenance, like trimming branches or maintaining your roof, can result in damage or loss that may have been avoided with proper care.
Not securing your home or valuables
Leaving doors, windows, or garages unlocked, or failing to securely lock up valuables, like jewelry, can result in theft.
Being less cautious with home upgrades or renovations
Cutting corners on home repairs due to cost, DIY, or skipping permits and inspections may lead to serious safety issues that result in damage or injury.
Not taking fire prevention seriously
Forgetting to change smoke detector batteries, leaving candles burning, blocking exits, or creating other fire hazards can result in a house fire and serious property damage, injury, or death.
How moral hazard can affect your home insurance costs
Home insurance companies consider many factors when setting home insurance rates, including your location, the cost to replace your home, natural disasters, and safety features. But homeowner behavior also affects how much you pay.
When determining your premium, insurance companies carefully review your claims history and may use shared nationwide claim databases to see past claims.[4] If you have a history of making multiple claims, you’ll most likely have to pay higher rates, since insurers see you as statistically more likely to make additional future claims.
Moral hazard vs. insurance fraud
Moral hazard is a type of behavior that occurs when policyholders engage in risky but unintentional behavior that may result in filing a claim for damages. A homeowner may skip important home maintenance or leave valuables out, assuming that insurance will take care of the cost if something happens.
Insurance fraud, on the other hand, occurs when a homeowner tries to deceive an insurer for financial gain. Acts of fraud may range from a homeowner lying about what was stolen during a theft to something as serious as arson.
Moral hazard can result in higher premiums or even a denied claim if the insurer determines that the damage was the result of negligent homeowner behavior. But committing fraud is illegal and can result in legal consequences, like fines or even jail time in severe cases.
Moral hazard vs. adverse selection in insurance
Moral hazard begins after a policy starts, when having less personal financial responsibility for damages may encourage a homeowner to engage in risky, irresponsible behavior. Adverse selection occurs when a homeowner decides to purchase additional insurance coverage due to higher risk factors that the insurer doesn’t know about.[5]
Concept
When It Happens
Explanation
Moral hazard
After the insurance contract is signed
The insured adopts an attitude of “don’t worry, insurance will cover it,” which can lead to riskier behavior
Adverse selection
Before the insurance contract is signed
The insured buys coverage based on risks not known to the insurer
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How insurance companies limit moral hazard
To reduce financial risk, many insurance companies take steps to limit moral hazard. These include:
Deductibles: Insurers typically require homeowners to pay a deductible before covering a claim. The amount is the same whether filing a claim for $1,000 or $20,000 in damages. A high deductible may encourage homeowners to act more responsibly to avoid filing a claim.
Coverage limits:Coverage limits vary widely, but they’re designed to limit insurance reimbursements. Since insurance may not cover the full cost of loss or damages, homeowners may think twice about taking preventative measures.
Exclusions for poor maintenance: Many insurance policies won’t cover damage when homeowners skip regular maintenance. So if a pipe bursts due to negligence, causing damage, the insurer could deny the claim, leaving the homeowner to pay out of pocket for repairs.
Claims history reviews: Insurers may charge higher premiums to homeowners with a history of filing claims, even if the claims were with other insurers. Insurance companies can also choose to deny coverage altogether or not renew an existing policy.
Discounts for loss prevention: Many insurers encourage responsible homeownership by offering premium discounts when homeowners take steps to reduce loss, like installing security systems or devices that detect leaks.
Moral hazard in home insurance FAQs
These answers to commonly asked questions offer more information about the concept of moral hazard in home insurance.
Is moral hazard the same as poor home maintenance?
No. Only some types of poor home maintenance are moral hazards, like not clearing ice dams. The concept of a moral hazard also includes many other types of risky acts beyond maintenance, such as not locking your doors or forgetting to change your smoke detector batteries.
Can moral hazard increase home insurance premiums?
Yes. If you file a claim for damages that resulted from a moral hazard, your insurer could raise your premium. Insurance companies may also increase premiums for all policyholders to offset moral hazard costs.
Do deductibles reduce moral hazards in home insurance?
Sometimes. Having to pay a deductible to file a claim may encourage homeowners to be more responsible, as they’re required to share some of the responsibility with the insurer.
Does filing many small claims count as a moral hazard?
No. A moral hazard isn’t a type or amount of claims. Rather, it’s the act of irresponsible homeownership that can result in claims.
Can homeowners avoid moral hazard issues?
Yes. Homeowners can avoid moral hazard by taking steps to prevent property damage and liability issues. Easy changes include locking your home when you leave, changing smoke detector batteries when they’re dead, and taking care of your home. Avoid risky behaviors and filing claims that are lower than your deductible when possible.
Methodology
Insurify data scientists analyzed rates from more than 180 home insurance companies sourced directly from Insurify’s partner companies and Quadrant Information Services. Rates span all 50 states and Washington, D.C., and quote averages represent the mean price for a given coverage level and geographic area. To ensure data reliability, only insurers meeting minimum quote thresholds were included in the analysis.
Unless otherwise specified, quoted rates reflect the average cost for homeowners with no prior claims and good credit with a home construction year of 1980. The default coverage assumptions include:
Default Coverage Assumptions
Dwelling coverage: $300,000
Deductible: $1,000
Personal property limit: $25,000
Liability limit: $300,000
Additional data points beyond these default values are sourced from Insurify’s proprietary database. Rates are updated monthly.
Background working with banks and insurance companies
Sarah enjoys helping people find smarter ways to spend their money. She covers auto financing, banking, credit cards, credit health, insurance, and personal loans.
Featured in
Sarah enjoys helping people find smarter ways to spend their money. She covers auto financing, banking, credit cards, credit health, insurance, and personal loans.
Sara Getman is an Associate Editor at Insurify and has been with the company since 2022. Prior to joining Insurify, Sara completed her undergraduate degree in English Literature at Simmons University in Boston. At Simmons, she was the Editor-in-Chief for Sidelines Magazine (a literary and art publication), and wrote creative non-fiction.
Outside of work, Sara is an avid reader, and loves yoga and knitting.
David Marlett is the Managing Director of the Brantley Risk and Insurance Center. He is a professor in the Department of Finance, Banking, and Insurance at Appalachian State University and holds the IIANC Distinguished Professorship. David also serves on the Board of Directors for the Invest program and previously chaired the Loman Advisory Committee for the CPCU Society.
David has taught courses in Risk Management and Insurance for the last 25 years, starting at Florida State University while in the doctoral program. Prior to graduate school, David worked as a commercial lines underwriter for USF&G in Tampa.
He serves as a resource on insurance issues and is a frequent media contributor. He has been quoted by a wide range of outlets, including The New York Times, CNN, Reuters, and NPR.
David has been reviewing articles for Insurify since March 2025.
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