When does an insurer need to disclose their suspicion of a moral hazard to the applicant?

In the context of insurance, a moral hazard refers to the increased risk of loss that arises because the insured party may engage in riskier behavior when they have insurance coverage. Insurers often assess potential moral hazards during the underwriting process, but they are not required to disclose their suspicion of a moral hazard to the applicant. The rationale behind this is rooted in the nature of the insurer-applicant relationship. There is an expectation that the insurance company will conduct its internal evaluations and determinations without needing to share subjective assessments or potential concerns.

The insurer's focus is primarily on assessing risks and determining appropriate premiums, and if they suspect a moral hazard, they may take action such as adjusting the terms of the policy or increasing premiums without an obligation to communicate these suspicions directly to the applicant. This maintains the confidentiality of the insurer's internal assessments and decisions.

In contrast, at policy issuance, during the policy review, or after a claim is made, the insurer's responsibilities revolve around fulfilling the terms of the policy and providing the applicant or policyholder with relevant information that is necessary for understanding their coverage, rather than disclosing suspicions related to moral hazards.