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

What a "Cause of Loss" Means

A peril is the cause of a loss — fire, windstorm, theft, vandalism. A hazard is a condition that increases the chance or severity of a peril. Property policies do not insure "everything that goes wrong"; they insure against covered causes of loss, and the way those causes are described is the single biggest driver of how broad a policy is. On the exam this is tested as named-peril versus open-peril (also called "all-risk" or "special" form).

Under the ISO commercial property program, the Causes of Loss Forms are stand-alone forms attached to the Building and Personal Property Coverage Form (CP 00 10). There are three: Basic (CP 10 10), Broad (CP 10 20), and Special (CP 10 30). The first two are named-peril; the Special form is open-peril.

The Burden-of-Proof Trap

The most-tested distinction is who must prove what.

• Named-peril: the policy lists the covered perils. The insured must prove the loss was caused by a listed peril. If theft is not listed, a theft loss is not covered.
• Open-peril (special form): all direct physical loss is covered unless excluded. The burden flips — the insurer must prove an exclusion applies to deny the claim.

Because the insured carries the burden under named-peril and the insurer carries it under open-peril, open-peril coverage is broader and costs more. Exam questions love the phrase "who has the burden of proof" — answer by form type, not by the facts of the loss.

The Three ISO Causes-of-Loss Forms

A memory aid for the original named perils is WCSHAVVE-RR style lists, but the exam tests the hierarchy: Broad includes everything in Basic; Special covers everything except listed exclusions. Glass breakage and theft are NOT covered by Basic or Broad unless added — they fall under Special's open-peril grant.

Personal-Lines Parallel

The same logic appears in personal lines. Dwelling Policy forms (DP-1 basic, DP-2 broad, DP-3 special) and Homeowners forms (HO-2 broad, HO-3 special on the dwelling/open-peril, HO-5 open-peril on dwelling and contents) mirror the commercial structure. HO-3 is the workhorse: open-peril on the structure (Coverages A and B), named-peril on contents (Coverage C). HO-5 extends open-peril to contents too. Watch for questions that ask which form gives open-peril coverage on personal property — that is HO-5, not HO-3.

Common Exclusions Even Under Open-Peril

Even the Special form excludes certain causes. The classic excluded perils are flood, earthquake, war, nuclear hazard, ordinance or law, wear and tear, and intentional acts. Flood and earthquake are excluded across virtually all standard property forms and must be insured separately (NFIP flood policy, earthquake endorsement, or DIC). A favorite distractor: "a special form covers everything" — false; it covers everything except the named exclusions and any specifically scheduled limitations.

Why Open-Peril Exclusions Are Written as They Are

Exclusions exist for predictable reasons, and the exam expects you to recognize the category, not memorize every word. There are four common rationales:

• Catastrophic / uninsurable spread of risk — flood, earthquake, war, and nuclear loss affect too many insureds at once to be pooled affordably.
• Not fortuitous — wear and tear, inherent vice, deterioration, and mechanical breakdown are expected, not accidental, so they are maintenance, not insurance.
• Covered elsewhere — auto, aircraft, and watercraft losses belong in other policies to avoid duplication and gaps.
• Moral hazard / public policy — intentional acts by the insured are excluded so coverage cannot reward wrongdoing.

When a question describes a gradual leak, rust, or settling cracks, the answer is usually "excluded as wear and tear," even under a broad open-peril grant.

Coverage Triggers and the "Direct Physical Loss" Standard

Both named-peril and open-peril forms require direct physical loss or damage to covered property as the coverage trigger. "Direct" means the peril must be the immediate cause; remote or purely economic losses (lost market value, diminished resale appeal) are not covered without a specific extension.

This is why business income and extra expense coverages exist as separate insuring agreements — the policy must explicitly grant indirect (consequential) loss, because the basic property grant only responds to physical damage to the described property. Recognizing that a fact pattern describes an indirect loss with no physical damage is a frequent way the exam tests whether a student understands the trigger.

Direct vs. Indirect (Consequential) Loss

Property exams separate direct loss - physical damage to the covered property by a covered peril (the fire burns the building) - from indirect or consequential loss - the financial loss that follows the direct loss (the business cannot operate and loses income while it rebuilds). Direct damage is covered by the basic property form; indirect loss requires business income / extra expense coverage on the commercial side or additional living expense (Coverage D) on the personal side. A question describing "lost rents" or "the cost of a hotel while the home is repaired" is testing indirect loss.

Proximate Cause and Concurrent Causation

When a chain of events leads to damage, the proximate cause is the dominant, efficient cause that sets the chain in motion in an unbroken sequence. If the proximate cause is a covered peril, the resulting loss is generally covered even if an excluded peril appears later in the chain. Concurrent causation arises when two or more perils - one covered, one excluded - combine to cause a single loss; modern policies use anti-concurrent-causation language to deny the entire loss when an excluded peril (such as flood or earth movement) participates.

This is why a wind-driven storm surge that floods a home is denied even though wind is covered.