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

What a Peril Is — and Is Not

The single most tested distinction in property insurance is peril versus hazard. A peril is the actual cause of a loss: fire, windstorm, theft, lightning, hail. A hazard is any condition that increases the likelihood or severity of a peril. Confusing the two is a classic exam trap.

Think of the chain of loss: a hazard makes a peril more likely, the peril strikes, and the result is the loss. A pile of oily rags (hazard) raises the odds of a fire (peril) that destroys the building (loss). The policy insures against the peril; it does not pay simply because a hazard exists. Examiners love a question that lists a condition and asks whether it is a peril or a hazard, so read every word.

The Three Hazard Types

• Physical hazard — a tangible condition that raises risk: oily rags in a basement, a worn electrical panel, an icy sidewalk.
• Moral hazard — a dishonest tendency that increases loss probability: an insured who would intentionally burn a failing business for the insurance money.
• Morale hazard — carelessness or indifference because insurance exists: leaving doors unlocked because "theft is covered."

Named-Peril vs. Open-Peril Coverage

A named-peril form (also called specified-peril) covers a loss only if it is caused by a peril expressly listed in the policy. If the peril is not on the list, there is no coverage — even if the loss is sudden and accidental.

An open-peril form (historically all-risk) covers loss from any cause except those specifically excluded. Open-peril is broader and costs more.

The Burden of Proof Flips

This is heavily tested. Under a named-peril policy, the insured must prove the loss was caused by a covered peril. Under an open-peril policy, coverage is presumed, so the insurer must prove an exclusion applies to deny the claim. Open-peril is therefore more favorable to the policyholder.

Practically, this means an open-peril claim starts as a covered claim. If a pipe bursts and the cause is unclear, the insured under open-peril coverage gets paid unless the insurer can point to an exclusion such as wear and tear or freezing in a vacant building. Under a named-peril form, the same insured would have to identify the burst pipe as a listed water-damage peril before a dollar is paid. The shift in who must prove what is the practical value of the higher open-peril premium.

Exclusions and Why They Exist

Both peril bases rely on exclusions — causes the policy will not cover. Common property exclusions include flood, earth movement (earthquake), war, nuclear hazard, intentional loss, ordinance or law, and wear and tear. Insurers exclude losses that are catastrophic, uninsurable, better covered elsewhere, or within the insured's control. Flood and earthquake are excluded from standard forms and must be bought separately — flood through the National Flood Insurance Program or a private flood policy.

Named-Peril vs. Open-Peril at a Glance

The ISO Causes of Loss Forms

The Insurance Services Office (ISO) publishes three commercial Causes of Loss forms that attach to the Building and Personal Property Coverage Form:

1. Basic Form (CP 10 10) — a short named-peril list: fire, lightning, explosion, windstorm or hail, smoke, aircraft or vehicles, riot or civil commotion, vandalism, sprinkler leakage, sinkhole collapse, and volcanic action.

1. Broad Form (CP 10 20) — the Basic perils plus falling objects; weight of snow, ice, or sleet; water damage; and limited collapse coverage. Still named-peril, just a longer list.

2. Special Form (CP 10 30) — open-peril. It covers direct physical loss unless the cause is excluded. This is the broadest and most expensive of the three. "Special" on the exam always means open-peril.

On the personal lines side the same idea appears in homeowners forms. The HO-3 insures the dwelling on an open-peril basis but covers personal property on a named-peril basis, while the HO-5 is open-peril on both. The HO-8 modified form uses named perils and ACV settlement for older homes. Whenever you see "special" or "comprehensive" attached to a form, read it as open-peril; "broad" and "basic" signal a named-peril list of increasing length.

Exam Strategy

When a question describes a loss, first identify the peril basis of the form, then decide who must prove what. If the form is named-peril, ask whether the cause is on the list. If it is open-peril, ask whether an exclusion bars the loss. This two-step habit answers the majority of property-coverage scenario questions quickly and correctly.

Direct vs. Indirect Loss

Property perils produce two kinds of loss the exam separates carefully. Direct loss is the immediate physical damage from the peril — the fire that burns the store. Indirect (consequential) loss is the financial loss that follows, such as lost business income while the store is closed or extra living expenses while a home is repaired. Standard property forms cover direct loss; indirect loss requires business-income, extra-expense, or loss-of-use coverage, which is examined as a distinct concept.