What does the term ‘peril’ refer to in insurance?

In the context of insurance, the term ‘peril’ specifically refers to a cause of loss that is covered under a policy. This means it is an event or situation that can result in a financial loss for the insured, and the insurance policy is structured to provide coverage for such specific risks. Common examples of perils include fire, theft, natural disasters, and accidents.

Understanding the definition of peril is essential for both policyholders and those in the insurance industry because it delineates the circumstances under which an insurance claim can be made. If a peril is explicitly stated within the terms of the insurance policy, the insurer agrees to compensate the insured for losses resulting from that peril, provided all other policy conditions are met.

The other choices refer to different aspects of insurance. A circumstance that increases risk relates more to underwriting and how insurers assess an applicant for insurance. The policyholder's responsibilities involve the obligations they have under the contract, such as paying premiums and notifying the insurer of changes. The financial limits of coverage pertain to the maximum amount that the insurer will pay for a covered loss. Each of these components is relevant to understanding insurance policies, but they do not capture the essence of what a peril is.