2.1 Causes of Loss / Named-Peril vs. Open-Peril
Key Takeaways
- A peril is the cause of loss; a hazard is a condition that increases the chance or size of a loss. Physical, moral, and morale hazards are separately tested.
- Named-peril (Basic and Broad) coverage pays only for listed causes and puts the burden of proof on the INSURED.
- Open-peril (Special) coverage pays for any cause not excluded and shifts the burden of proof to the INSURER.
- ISO names three Causes of Loss forms: Basic (CP 10 10), Broad (CP 10 20), and Special (CP 10 30); breadth and premium rise from Basic to Special.
- Flood, earthquake, war, nuclear hazard, wear and tear, and intentional acts are excluded under every standard form, including Special.
Peril and Hazard Are Not the Same
A peril is the actual cause of a loss, such as fire, windstorm, or theft. A hazard is a condition that makes a loss more likely or more severe. The exam consistently separates three hazard types, and confusing them is a frequent trap.
| Hazard | What it is | Example |
|---|---|---|
| Physical hazard | A tangible condition of property or person | Frayed wiring; a slick loading dock |
| Moral hazard | Active dishonesty; the insured wants a loss | Arson for profit; faked burglary |
| Morale hazard | Carelessness from having insurance | Leaving keys in a car; ignoring a leak |
Keep the memory hook simple: moral hazard equals deceit, morale hazard equals indifference.
Named-Peril Coverage
Named-peril coverage (also called specified-peril) responds only to causes of loss specifically listed in the policy. If the cause is not on the list, there is no coverage. Critically, the insured bears the burden of proof and must demonstrate that the loss came from a listed peril.
Typical named perils, in the order most exams present them, include:
- Fire and lightning
- Windstorm and hail
- Explosion; smoke
- Riot or civil commotion; aircraft; vehicles
- Vandalism and malicious mischief
- Theft
- Volcanic action
Because the list is finite, named-peril coverage is narrower and carries a lower premium.
Open-Peril (Special) Coverage
Open-peril coverage, often called all-risk or Special, covers every cause of loss except those specifically excluded. The defining feature is that the insurer bears the burden of proof: to deny a claim, the company must point to an exclusion. This broader protection costs more.
| Feature | Named-peril | Open-peril |
|---|---|---|
| What is covered | Only listed perils | All causes except exclusions |
| Burden of proof | On the insured | On the insurer |
| Premium | Lower | Higher |
| ISO label | Basic / Broad | Special |
Scenario: A falling drone smashes a skylight. Under named perils the insured must locate "falling objects" on the list; under open perils the loss is paid unless an exclusion fits.
The Three ISO Causes of Loss Forms
In commercial property, the Insurance Services Office (ISO) publishes three Causes of Loss forms that attach to the Building and Personal Property Coverage Form. You should recognize the form numbers.
| Form | ISO number | Coverage trigger | Burden |
|---|---|---|---|
| Basic | CP 10 10 | Short named-perils list | Insured |
| Broad | CP 10 20 | Expanded named-perils list | Insured |
| Special | CP 10 30 | All risks except exclusions | Insurer |
Broad Form adds the second tier of perils to Basic: falling objects; weight of snow, ice, or sleet; water damage from plumbing; and collapse from specified causes. The progression from Basic to Broad to Special widens coverage and raises premium.
Standard Exclusions Apply Even to Special Form
Open-peril coverage is broad, but it is not unlimited. The same core exclusions appear across forms, and most exclusion questions draw from this list.
| Category | Examples | Reason |
|---|---|---|
| Catastrophic | Flood, earthquake, war, nuclear hazard | Correlated or uninsurable risk |
| Behavioral | Intentional loss, illegal acts | Controls moral hazard and fraud |
| Maintenance | Wear and tear, rust, mold, vermin, settling | Gradual and expected, not fortuitous |
| Mechanical | Mechanical breakdown | A warranty issue, not sudden loss |
Flood and earthquake must be added by separate policy or endorsement. Flood is written through the National Flood Insurance Program (NFIP), with residential maximums of $250,000 building and $100,000 contents.
Anti-Concurrent-Causation and Insurable Risk
When a covered peril and an excluded peril combine to cause one loss, insurers rely on anti-concurrent-causation (ACC) wording: if an excluded peril contributes in any way, the whole loss is excluded.
Scenario: A hurricane causes both wind damage (covered) and storm-surge flooding (excluded). Adjusters must separate and document the wind-only portion to pay it while denying the flood portion.
Exclusions trace to the traits of an insurable risk — losses should be definite, fortuitous, non-catastrophic, and calculable. Flood and earthquake fail the non-catastrophic test; wear and tear fails the fortuitous test.
Ordinance or Law and the Earthquake Deductible
Even Special Form excludes the increased cost of construction to meet current building codes when rebuilding. After a covered fire, an older building may need new wiring, sprinklers, or accessibility upgrades; the base policy restores it as it was, and an ordinance or law endorsement is required to pay the code-upgrade cost.
Earthquake, when added by endorsement, characteristically uses a percentage deductible of 10 to 20 percent of the dwelling limit rather than a flat dollar figure. On a $400,000 home, a 15 percent earthquake deductible is $60,000. California residents commonly buy through the California Earthquake Authority (CEA).
Reading a Cause-of-Loss Question
Many exam items hinge on identifying which form is in force and then reasoning about burden of proof. A reliable approach:
- Ask whether the policy is named-peril (Basic/Broad) or open-peril (Special).
- If named-peril, check whether the cause appears on the list; if it does not, there is no coverage and the insured could not meet the burden.
- If open-peril, assume coverage and look for a matching exclusion; if none fits, the insurer cannot deny.
- Watch for flood and earthquake disguised inside a covered event such as a hurricane or aftershock fire.
Under an open-peril (Special Form) policy, which party must prove its position when a claim is contested?
An insured stops repairing a known roof leak because 'the policy will cover it anyway.' This attitude is best described as: