2.4 Perils, Causes of Loss & Exclusions

Perils, Causes of Loss & Exclusions

For a claims adjuster, determining if a loss is covered is just as critical as determining how much to pay. This relies on an intricate understanding of perils and standard policy exclusions.

Proximate Cause

The concept of Proximate Cause is central to insurance. It is defined as an unbroken chain of events leading from an initial cause to a resulting injury or damage.

If the proximate cause (the first peril in the unbroken chain) is a covered peril, the resulting damage is typically covered, even if the subsequent events in the chain are excluded perils.

Example: A fire (covered peril) breaks out in a home. The fire department arrives and sprays thousands of gallons of water, causing severe water damage. While "flood/water damage" is generally excluded, the proximate cause of the loss was the fire. Therefore, the water damage caused by extinguishing the fire is covered.

Concurrent Causation

Concurrent Causation occurs when two distinct perils simultaneously cause a loss. The legal doctrine of concurrent causation generally holds that if one of the perils is covered and the other is excluded, the entire loss is covered.

To combat this, modern insurance policies (like the ISO Homeowners and Commercial Property forms) contain Anti-Concurrent Causation lead-in language before the major exclusions. It states: "We do not insure for loss caused directly or indirectly by any of the following. Such loss is excluded regardless of any other cause or event contributing concurrently or in any sequence to the loss."

This language ensures that if a specifically excluded peril (like an earthquake) occurs simultaneously with a covered peril, the damage caused by the earthquake remains excluded.

Universal Property Exclusions

Whether you are dealing with a DP-3, an HO-3, or a Commercial Special Form, certain catastrophic or predictable perils are universally excluded. Adjusters refer to these as the "Big Exclusions."

1. Ordinance or Law

Standard policies exclude the increased costs associated with enforcing any building ordinance or law regulating the construction, repair, or demolition of a building.

• Scenario: A 1950s house burns down. The city now requires all new homes to have costly fire sprinkler systems. The standard policy pays to rebuild the 1950s house (RCV), but will not pay the extra $15,000 for the mandatory sprinkler system.
• (Note: Most HO policies give a small amount, typically 10% of Coverage A, back as an additional coverage for Ordinance or Law, but the primary peril remains excluded).

2. Earth Movement

This exclusion applies to earthquakes, landslides, mudflows, mine subsidence, and earth sinking, rising, or shifting.

• If an earthquake causes a building to collapse, the collapse is excluded.
• Ensuing Loss Exception: If an earthquake (excluded) causes a gas line to rupture, resulting in a fire (covered), the damage caused by the fire is covered. The damage caused directly by the shaking remains excluded.

3. Water Damage

The water exclusion is highly specific and critical for adjusters to understand. It excludes:

• Flood, surface water, waves, tidal water, tsunami, storm surge, or overflow of any body of water.
• Water or waterborne material which backs up through sewers or drains or overflows from a sump pump. (This is commonly added back via a "Water Backup and Sump Overflow" endorsement).
• Water or waterborne material below the surface of the ground, including water which exerts pressure on or seeps or leaks through a building, sidewalk, driveway, foundation, or basement walls.
• What IS covered? Accidental discharge from a plumbing system (e.g., a burst pipe in the wall) is covered under Broad and Special forms.

4. Power Failure

Excludes loss caused by the failure of power or other utility service if the failure takes place off the described premises.

• Scenario: A lightning strike at a substation three miles away knocks out power to the insured's house, causing a freezer full of meat to spoil. Excluded.
• Exception: If a lightning strike hits the insured's house directly and knocks out the power panel, causing spoilage, it is covered, because the failure occurred on the premises.

5. Neglect

Excludes loss resulting from the insured's failure to use all reasonable means to save and preserve property at and after the time of a loss. (e.g., failing to put a tarp over a hole in the roof after a storm, leading to further interior rain damage).

6. War & Nuclear Hazard

Damage caused by acts of war, insurrection, or nuclear reaction/radiation are universally excluded, as they represent uninsurable, catastrophic risks that only the government can bear.

7. Intentional Loss

Excludes coverage for any loss arising out of an act committed by or at the direction of an insured with the intent to cause a loss (Arson, fraud).

• Severability of Insurance: If a husband intentionally burns down the house, coverage is excluded for him. However, if the wife was innocent and completely unaware of the plot, the policy may still provide coverage for her interest in the property (depending on state law and specific policy wording).

Open Peril Unique Exclusions

If a policy is "Open Peril" (Special Form), the adjuster must also look for exclusions related to maintenance or inevitable deterioration. These are NOT sudden and accidental, and therefore are uninsurable:

• Wear and tear, marring, deterioration.
• Inherent vice (a quality within the property that causes it to destroy itself, like iron rusting or rubber rotting).
• Smog, rust, corrosion, dry rot.
• Settling, shrinking, bulging, or expansion of foundations.
• Damage caused by insects, birds, rodents, or vermin.