Which action is a classic example of a moral hazard?

• A. Using an alarm system
• B. Maintaining proper maintenance
• C. Parking in a safe area
• D. Intentionally lighting your car on fire

Answer: (D)

Moral hazard is about how a person’s behavior can change in response to having insurance or protections, leading to riskier or loss-causing actions because the cost of that loss is covered. The clearest example here is intentionally lighting the car on fire. That act creates a loss on purpose to obtain an insurance payout, which shows the exact incentive problem moral hazard describes: the insured actor engages in a destructive act because they don’t bear the full cost of the loss.

The other options depict risk-reducing and responsible behavior—having an alarm system, performing proper maintenance, and parking in a safe area. These actions lower the chance of a loss and reflect prudent risk management, not the risk-increasing behavior that characterizes moral hazard.