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

Causes of Loss and How Coverage Is Triggered

Property insurance pays only when a covered peril causes direct physical loss to covered property. A peril is the cause of loss (fire, windstorm, theft); a hazard is a condition that increases the chance or severity of a peril. The exam tests three hazard types: physical (an oily rag pile), moral (an insured who intends to defraud, such as arson for profit), and morale (carelessness — leaving doors unlocked because insurance exists).

The ISO Causes of Loss Forms

Commercial property writes coverage through three ISO Causes of Loss forms attached to the policy:

The homeowners equivalent: HO-2 is broad named-peril, HO-3 is open-peril on the dwelling but named-peril on contents, and HO-5 is open-peril on both.

Named-Peril vs. Open-Peril and the Burden of Proof

This is the single most-tested distinction in Section 2. The difference is who proves what:

• Named-peril (specified-peril): the insured must prove the loss was caused by a peril listed in the policy. If the cause is not on the list, there is no coverage.
• Open-peril (all-risk / special): coverage is presumed; the insurer must prove the loss falls under a stated exclusion to deny the claim.

Open-peril is broader and costs more. A classic trap: "all-risk" does not mean all losses are paid — exclusions (flood, earth movement, wear and tear, ordinance or law, war, nuclear hazard) still apply.

Direct vs. Indirect Loss

• Direct loss is the immediate physical damage (the fire burns the building).
• Indirect (consequential) loss is the loss of use that follows — business income, extra expense, or Additional Living Expense (ALE) under a homeowners policy.

Indirect coverage is only triggered when a covered peril causes a covered direct loss first. No covered direct loss means no indirect payment, regardless of the dollar impact on the insured.

Specified-Peril Lists You Must Memorize

The dwelling and homeowners named-peril lists build on each other, so memorize them as tiers. The DP-1 / HO-8 basic group is essentially fire, lightning, internal explosion, and (by extension endorsement) the extended coverage (EC) perils — windstorm, hail, explosion, riot or civil commotion, aircraft, vehicles, smoke, plus volcanic eruption and V&MM (vandalism and malicious mischief). The DP-2 / broad form adds burglar damage, falling objects, weight of ice/snow/sleet, accidental discharge of water or steam, freezing of plumbing, sudden tearing of a heating system, and artificially generated electrical current.

The DP-3 and HO-3 dwelling coverage then becomes open peril, while personal property usually stays named-peril.

Open-Peril Exclusions Carry the Real Limits

Because open-peril coverage presumes a loss is covered, the exclusions define the actual boundary. The standard exclusions to recognize are the "anti-concurrent causation" group: ordinance or law, earth movement, water damage (flood, surface water, sewer backup), power failure, neglect, war, nuclear hazard, and intentional loss, plus property-specific exclusions for wear and tear, deterioration, inherent vice, latent defect, smog, rust, mold, and damage by insects, birds, rodents, or domestic animals.

The exam loves the seepage/repeated-leakage exclusion (slow leaks are excluded; a sudden burst pipe is covered) and the distinction between a covered ensuing loss and the excluded originating cause.

Direct Physical Loss and the Concurrent-Causation Rule

"Direct physical loss" requires tangible alteration of covered property — a frequent trap is the question where the only "loss" is lost market value or a defect with no physical damage, which is not covered. When two perils combine (one covered, one excluded) to cause a single loss, the anti-concurrent-causation language in modern ISO forms denies coverage if an excluded peril is in the chain "regardless of any other cause or event contributing concurrently or in any sequence." This is why a wind-driven flood loss can be denied even though wind alone is covered.

Contrast the older "efficient proximate cause" approach, under which the dominant covered peril could pull the loss into coverage.

Ensuing Loss and Exam Pattern Recognition

The "ensuing loss" exception softens several exclusions: although the originating defect is excluded, a covered peril that results from it is paid. If faulty wiring (excluded as a defect) causes a fire (a covered peril), the fire damage is covered. Train yourself to split the chain into the excluded cause and the covered result. Likewise, the theft of building materials before a structure is finished, and theft from a dwelling under construction, are commonly excluded — a recurring stem.

When the exam describes mysterious disappearance or unexplained shortage, recall that mysterious disappearance is excluded under most property forms unless specifically endorsed.

Basic, Broad, and Special at a Glance

Memorize the three commercial Causes of Loss forms as a ladder. Basic (CP 10 10) is a short named-peril list; Broad (CP 10 20) adds falling objects, weight of snow/ice/sleet, and water-damage from plumbing, plus a limited collapse grant; Special (CP 10 30) flips to open-peril, covering all direct physical loss except what is excluded, and is the form most businesses choose. The same logic mirrors the dwelling and homeowners ladder, so a question that names a commercial form should immediately tell you whether the insured or the insurer carries the burden of proving the cause of loss.