Imagine a scenario - a restaurant owner is insured for $3 million dollars for the business and structure (not atypical).
Business isn’t doing great. The place catches on fire and burns down. All the business assets and the structure are lost, so the business needs to shut down.
If arson wasn’t an exclusion;
1) why would anyone look closer to figure out if it was intentional or not? Assuming no one was injured. Who has the incentive to do all the investigation?
2) even if they got caught and convicted, in California the jail penalty is only 3 years for structure arson. $3mln is a hell of a payday for three years in jail, and without the exclusion, they’d still be entitled to the payout.
3) what if they had a buddy do it, and the evidence they conspired wasn’t strong enough to get a criminal conviction - but enough for civil court. Or civil discovery would uncover evidence, where a criminal investigation may not.
Same dynamic plays out for life insurance, vehicle, personal liability, home insurance, etc.
Moral hazard is a real issue for any insurance, as knowledge that a payout can come due to a circumstance someone can intentionally trigger definitely changes the odds of those circumstances occurring. In some cases to the point of strongly encouraging or even outright warping the market so those circumstances occur regularly.
Without insurance, the owner is the one who bears the costs directly no matter what, so we’d likely have a lot fewer buildings burning down!
People would in general be a lot more careful, just like they’d be more careful driving if every car has a giant knife embedded in the center of the steering wheel instead of having airbags. A lot more lives would be ruined though when being careful isn’t enough eh? Or people get overwhelmed.
And of course insurance companies have a strong incentive to not pay out illegitimate claims. They’d go bankrupt if they did anything else!
Sometimes (or often, depending on your POV) they try to not pay out legitimate claims, which is why documentation and legal representation is important too - and why it’s such a heavily regulated industry pretty much everywhere.