What term describes the situation where one party takes risks that are protected, transferring the resulting losses to another party?

The concept being described is moral hazard. Moral hazard occurs when one party engages in risky behavior knowing that the consequences of that risk will be borne by another party. This situation often arises in insurance contexts where the insured party may take greater risks because they do not have to face the full consequences of their actions, as the insurer will cover the losses.

In this context, the party taking the risks may feel less motivated to act cautiously because they are shielded from the financial repercussions, leading to behavior that would otherwise be avoided if they were responsible for the full effects of their actions. This dynamic can lead to increased risk-taking and ultimately result in financial losses for the party that bears the consequences, typically the insurer or another party involved in the risk-sharing arrangement.

The other choices reflect different concepts. Risk transfer generally refers to the process of moving risk from one party to another, which doesn’t inherently include the behavior aspect. Liability coverage pertains to insurance policies that protect against claims resulting from injuries and damage to people or property, but does not encompass the behavior that leads to moral hazards. Indemnity relates to compensating one party for losses or damages incurred, typically related to agreements in place, but does not fully capture the essence of taking risks with the expectation