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

The Two Ways a Property Form Grants Coverage

Every property policy answers one question: which causes of loss does it pay for? There are two architectures, and the exam tests the difference relentlessly.

Named-peril (also called specified-peril) forms list each covered cause. If a peril is not on the list, there is no coverage. The insured bears the burden of proof to show the damage was caused by a listed peril.

Open-peril (also called special or all-risk) forms cover every cause of loss except those the policy excludes. Coverage is presumed; the insurer bears the burden of proof to show an exclusion applies. Open-peril is broader and costs more premium.

ISO Causes of Loss Forms (Commercial)

In the ISO Commercial Property program, the coverage grant lives in a separate Causes of Loss form that attaches to the Building and Personal Property Coverage Form (CP 00 10). Three editions grade the breadth of coverage.

A memory hook for the Basic perils is that fire and lightning are always first; the dwelling program mirrors this with DP-1 (Basic), DP-2 (Broad), and DP-3 (Special/open-peril on the dwelling).

Peril vs. Hazard

Students lose points by confusing these. A peril is the cause of a loss. A hazard is a condition that increases the probability or severity of a loss.

• Physical hazard — a tangible condition: oily rags, icy steps, frayed wiring.
• Moral hazard — dishonesty or an incentive to cause a loss: arson for profit, padding a claim.
• Morale (attitudinal) hazard — carelessness or indifference because insurance exists: leaving doors unlocked.

Fire is a peril; storing gasoline near a furnace is a physical hazard that makes the fire peril more likely or more severe.

Exclusions That Survive Even an All-Risk Form

Open-peril coverage is broad, but a recurring set of exclusions appears on virtually every property form because the exposures are catastrophic, uninsurable on a standard basis, or better handled by a separate policy.

1. Earth movement — earthquake, landslide, sinkhole subsidence (needs a separate endorsement/policy).
2. Flood / surface water — covered only through the NFIP or a private flood policy.
3. Ordinance or law — extra cost to rebuild to current code (CP 04 05 buys it back).
4. War and nuclear hazard.
5. Wear and tear, deterioration, inherent vice — maintenance items, not fortuitous losses.
6. Mold, fungus, and pollution — limited or excluded.

The exam trap: "all-risk" does not mean "all loss is paid." Anti-concurrent causation wording also means that if an excluded peril (like flood) contributes to the loss, the entire loss can be excluded even if a covered peril also contributed.

Concurrent Causation and Sequence-of-Events Traps

A single loss often has more than one cause, and the exam tests how policies respond. Anti-concurrent-causation (ACC) language says that if an excluded peril (such as flood or earth movement) contributes to a loss in any sequence, the entire loss is excluded even when a covered peril also operated. This wording — found in modern HO and commercial special forms — defeats the older court-made concurrent-causation doctrine that had forced carriers to pay when a covered and an excluded peril combined.

Contrast this with the ensuing-loss (exception-to-the-exclusion) rule: an otherwise excluded event that leads to a separately covered peril restores coverage for the ensuing damage. For example, faulty workmanship is excluded, but if the defect causes a covered fire, the fire damage is paid.

Direct vs. Indirect (Consequential) Loss

Property forms also separate direct physical loss — the immediate damage from the peril — from indirect (consequential) loss, such as lost business income or extra expense that flows from the inability to use the damaged property. Basic property coverage pays the direct loss; the time-element coverages must be added separately. Spoilage of refrigerated goods after a covered power interruption is a classic indirect loss that needs specific coverage, and recognizing the direct/indirect line is a recurring multiple-choice point.

Specified vs. Open Peril on Personal Property

A subtle exam point is that a single policy can grade coverage differently for buildings versus contents. The homeowners HO-3, for instance, insures the dwelling and other structures on an open-peril basis but covers personal property on a named-peril basis. Only the HO-5 (and the HO 00 15 contents endorsement) extends open-peril treatment to personal property. So a candidate analyzing a contents loss under an HO-3 must confirm the cause appears on the named-peril list, while the same cause would be presumed covered if it damaged the building. Mismatching the building and contents coverage triggers is a classic distractor.

Friendly Fire vs. Hostile Fire

A long-standing exam distinction is friendly fire versus hostile fire. A friendly fire stays where it is intended to be — in a fireplace, furnace, or stove — and damage from it (smoke staining, an item dropped into the flames, scorching) is not covered. A hostile fire has escaped its intended boundaries or never had a proper place, and damage from it is covered. So a ring tossed into a working fireplace is an uncovered friendly-fire loss, while the same fire spreading to the drapes becomes a covered hostile fire.

This pair appears often as a single multiple-choice item testing whether candidates can classify the fire before deciding coverage.