Risks vs Perils vs Hazards in Insurance
Article • 5 minutes
By Matic
When it comes to reading your homeowners insurance policy, it’s perfectly understandable that you might feel intimidated combing through all of the different sections, especially when the industry seems to have a language all its own.
And yet it’s so important that you do read and fully understand what you’re signing up for so that you can feel confident you have the coverage you need. The secret to doing so is to simply learn the terminology that ultimately makes up your policy.
Three terms in particular can sometimes cause a lot of confusion for policyholders: Risk, peril, and hazard. That’s because at first glance they’re very similar to each other, and in our everyday speech, we might even use them interchangeably. But in the world of insurance, each of those words has a very specific definition.
Below, we define risk, peril, and hazard in the context of insurance and offer a number of examples of each so that you’ll be better equipped to make an informed decision when shopping for your next policy.
What are risks?
In the world of insurance, the word risk simply refers to the possibility of a loss.
Insurance companies consider a variety of factors in order to determine the amount of risk involved in issuing a policy. Risk factors are used to determine insurance rates, and they directly affect your premiums. Generally speaking, the greater the amount of risk that exists, the higher your premiums could be.
Common types of insurance risks
There are many different types of risk. For the purposes of homeowners insurance, the most important types are typically broken into the following buckets:
- Personal risk: Personal risk refers to any possibility of loss that might directly affect an individual, such as injury or death.
- Property risk: Property risk refers to any possibility of loss that might affect a piece of property, such as a home or covered contents.
- Legal risk (or liability risk): Legal or liability risk refers to any possibility of loss that might arise from a lawsuit.
What are perils?
A peril is the direct cause of a loss, or the source of the loss. For example, if your house is damaged by a lightning strike, the lightning strike is considered to be the peril. If your house catches on fire, then fire will likely be considered the peril. The list goes on.
In other words, perils are essentially what you are insuring your home, vehicles, or property from.
Some homeowners insurance policies insure against perils specifically named in the policy (called named perils). Other policies will provide broad coverage against all perils except for those specifically excluded (called exclusions).
For more information about perils covered by different types of homeowners insurance policies, see our guide here.
Common types of insurance perils
Some of the most common perils that you will typically find in a Named Peril homeowners insurance policy include damage or destruction caused by:
- Fire or smoke
- Lightning
- Power surges
- Windstorm or hail
- Weight of ice or snow
- Falling objects
- Explosion
- Riot or civil commotion
- Aircraft and other vehicles
- Vandalism or mischief
- Theft
- Freezing temperatures
- Volcanic eruption
Keep in mind that some of the items on the list may not apply in every homeowners insurance policy. You should always refer to the details of your policy for specifics on coverage.
What are hazards?
A hazard is anything that either directly leads to a loss or anything that increases the likelihood of a loss. If your home has a swimming pool, for example, it could be considered a hazard because it increases the likelihood that someone might be injured on your property.
Because the presence of certain hazards increases the likelihood of a loss, insurance companies ask detailed questions about your home before agreeing to provide coverage. When your home is inspected and the inspector finds hazards, your rate will likely increase — or your carrier could decide to cancel your policy.
Common types of insurance hazards
Hazards are commonly broken out into three main groups — physical hazards, moral hazards, and morale hazards — but physical hazards are what insurance inspectors are looking for when they assess your property. With this in mind, some common physical hazards you might want to be aware of include:
- A swimming pool or hot tub, which could increase the likelihood of physical injury or death
- Clogged or damaged gutters, which could increase the likelihood of water damage after a storm
- Fuse boxes or frayed electrical wiring, which could increase the likelihood of a fire
- Large tree limbs over the home, which could increase the likelihood of roof damage
- Large cracks in sidewalks or driveway, which could increase the likelihood of trips or falls
So, how are they all related?
With all of this in mind, you can think of the relationship between risk, peril, and hazard like this:
- A risk is the potential for a loss
- A peril is the cause of a loss
- A hazard is something that increases the likelihood of a loss
At first glance, it sounds confusing, but once you really understand what the words mean, it all starts to make a lot more sense.
Buying homeowners insurance doesn’t need to be complicated. By learning the language behind your policy, you’ll be in a better position to truly evaluate your coverage options and find the policy that best serves your needs.
The process of shopping for homeowners insurance and auto insurance should be as easy and uncomplicated as possible.
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