2.1 Causes of Loss / Named-Peril vs. Open-Peril

What the Policy Is Insuring Against

Every property policy answers one question first: which causes of loss does it cover? A peril is the direct cause of a loss — fire, windstorm, theft, or water damage. A hazard is a condition that increases the likelihood or severity of a peril. The exam tests both the named-peril/open-peril distinction and the three hazard types, so anchor those before learning specific forms.

Understanding causes of loss also drives risk selection and pricing. Underwriters review the perils a property is exposed to, the hazards that aggravate them, and the form requested, then decide whether to accept, modify, or decline the risk. A candidate who can map a fact pattern to the correct form and burden of proof can answer most Chapter 2 items quickly.

The Three Hazards

Three hazard categories appear repeatedly on the national portion:

• Physical hazard — a tangible condition that increases risk, such as an oily rag pile, icy steps, frame (rather than masonry) construction, or worn electrical wiring.
• Moral hazard — a dishonest tendency: an insured who would intentionally cause or exaggerate a loss, such as arson for profit, inflating an inventory, or staging a theft.
• Morale hazard — indifference arising from having insurance: leaving doors unlocked, ignoring a leaking pipe, or driving carelessly because "the policy will pay."

Distinguish moral (dishonesty) from morale (carelessness) carefully — the exam loves to test the one-letter difference. Both raise expected losses, but only moral hazard involves intent to profit.

Named-Peril Coverage

A named-peril (or "specified peril") form covers only the perils explicitly listed in the policy. The burden of proof is on the insured to show the loss came from a listed peril. If the cause is not named, there is no coverage — even if it was sudden and accidental. Because the carrier's exposure is narrower, named-peril forms carry a lower premium than open-peril forms.

The ISO Causes of Loss – Basic Form (CP 10 10) lists roughly eleven perils — fire, lightning, explosion, smoke, windstorm and hail, riot and civil commotion, aircraft and vehicles, vandalism, sprinkler leakage, sinkhole collapse, and volcanic action. The Broad Form (CP 10 20) adds the "WC FFB" perils — falling objects; weight of ice, snow, or sleet; water damage from accidental discharge; and building glass breakage — plus collapse as an additional coverage. The homeowners analogues are HO-1 (basic) and HO-2 (broad), with HO-2 used far more often than HO-1.

Open-Peril Coverage

An open-peril form (older texts say "all-risk") covers all direct physical loss except what the policy specifically excludes. This flips the burden of proof: the insurer must prove an exclusion applies to deny a claim. The ISO Causes of Loss – Special Form (CP 10 30) is the open-peril commercial form, and HO-3 and HO-5 provide open-peril coverage on the homeowners side — HO-3 on the dwelling (Coverage A) with named-peril contents, and HO-5 on both dwelling and contents on an open-peril basis. Open-peril forms cost more because the carrier covers any cause it has not carved out.

Quick Comparison

Exclusions That Survive Open-Peril

Even "open" coverage is not unlimited. Standard exclusions on the Special Form include earth movement (earthquake, landslide), flood and surface water, war, nuclear hazard, ordinance or law, wear and tear/deterioration/inherent vice, mechanical breakdown, and insect, vermin, or rodent damage. Flood and earthquake are excluded under all standard forms and require separate policies or endorsements — a frequent exam trap.

Many of these exclusions exist because the losses are not fortuitous (wear and tear, deterioration) or are catastrophic and uninsurable in the standard market (flood, war, nuclear). Knowing why an exclusion exists helps you recall which form it sits in.

The Proximate Cause Rule

When a covered peril sets a chain of events in motion, the loss is generally covered even if a later link would itself be excluded — this is the proximate (efficient) cause doctrine. For example, lightning (covered) that starts a fire (covered) is paid. However, modern forms add anti-concurrent-causation language so that when an excluded peril such as flood or earth movement contributes to a loss in any sequence, the loss is excluded. Expect at least one item testing this interaction.

Common Traps

• A named-peril policy that omits "theft" does not cover stolen property, period.
• Open-peril is not "all-loss" — the long exclusion list still applies.
• Flood is never covered by an unendorsed property policy; point candidates to the NFIP.
• Moral hazard = dishonesty; morale hazard = carelessness — do not confuse them.

Direct vs. Indirect Loss

Finally, separate direct loss (physical damage to the covered property itself, such as fire destroying a building) from indirect or consequential loss (the financial fallout, such as lost rents or business income while the building is repaired). Causes-of-loss forms attach to direct damage coverage; indirect losses require time-element coverages (business income, extra expense, loss of rents) that respond only when a covered peril triggers a covered direct loss first. A peril must be covered for both pieces to pay — another reason the named-peril vs. open-peril choice cascades through the whole policy.