Iowa Property & Casualty Practice Exam

A moral hazard occurs when an individual or entity engages in riskier behavior because they are insulated from the consequences of that behavior, often due to insurance or other forms of protection. In this case, criminal activity exemplifies a moral hazard because a person who feels protected (either through insurance that covers theft or through the belief that they won't be caught) may be more inclined to engage in unlawful acts. The existence of insurance or the perception of reduced personal risk can lead to actions that they might not take if they bore the full responsibility for the outcome.

Other options like weather-related events, carelessness in safety protocols, and equipment failure do not inherently involve moral hazard. Weather-related events are external and unavoidable factors, while carelessness in safety protocols can be a result of negligence rather than a moral choice influenced by perceived safety. Equipment failure, similarly, tends to be a mechanical or operational issue rather than a behavior influenced by a lack of consequences. Thus, criminal activity stands out as a prime example of the moral hazard concept.