A moral hazard is a risk that a party has entered a contract in bad faith or has misrepresented its assets, liabilities, and credit capacity. Moral hazards result from hidden actions, such as driving behavior not observable to insurance companies (Froeb et al., 2018). The apartment complex I use to work at requires residents to purchase renters' insurance. I quickly found out that many residents do not lock their doors when they leave their apartments. Many residents do not lock their doors because they know that if their items get stolen their renter's insurance policy will cover their loss. The office cannot force residents to lock their doors, but they do post reminders around the property and post on their social media accounts reminding residents to lock their cars and doors.

How can the insurance company minimize the risk they are taking by selling renters' insurance?