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 severity of a peril.
- Moral hazard = dishonesty; morale hazard = indifference because coverage exists; physical hazard = tangible condition.
- Named-peril forms cover only listed perils and the insured proves the cause; open-peril (special/all-risk) forms cover all direct physical loss except exclusions and the insurer proves the exclusion.
- ISO commercial Causes of Loss build up Basic (CP 10 10) → Broad (CP 10 20) → Special (CP 10 30); theft is only covered under Special.
- Open-peril is not unlimited — it merely reverses the burden of proof.
Perils, Hazards, and the Cause of Loss
A peril is the cause of a loss — the event that produces damage, such as fire, windstorm, theft, or vehicle collision. A hazard is a condition that increases the likelihood or severity of a peril. The exam tests this distinction constantly: lightning is a peril; a stack of oily rags in a basement is a hazard. The whole architecture of a property policy is built around deciding which perils are covered and how broadly.
Three Categories of Hazard
- Physical hazard — a tangible condition: icy steps, frayed wiring, stored gasoline.
- Moral hazard — dishonesty or character that invites loss: an insured who has burned property for money before.
- Morale hazard — indifference because insurance exists: leaving doors unlocked because "the policy will pay."
Watch the spelling trap: moral = dishonesty; morale = carelessness/attitude. Underwriters can decline or surcharge for hazards but never for the loss itself.
Named-Peril vs. Open-Peril Coverage
The single most important property coverage concept is the coverage trigger — what the policy covers and who carries the burden of proof.
| Feature | Named-Peril (Specified) | Open-Peril (Special / "All-Risk") |
|---|---|---|
| What is covered | Only perils listed in the form | All direct physical loss EXCEPT exclusions |
| Burden of proof | Insured proves the loss was a covered peril | Insurer proves an exclusion applies |
| Premium | Lower | Higher (broader) |
| ISO examples | HO-2, DP-1, BPP Basic/Broad Causes of Loss | HO-3 (dwelling), HO-5, DP-3, CP Special Form (CP 10 30) |
Open-peril is not unlimited coverage — that is the classic exam misconception. "Special" or "all-risk" coverage simply reverses the burden of proof and covers any direct physical cause unless an exclusion removes it. The favorable consequence for the insured: if the cause is unknown or hard to prove, an open-peril form still pays unless the insurer can name and prove an exclusion. Under a named-peril form, an unexplained loss is not covered because the insured cannot prove a listed peril caused it.
ISO Causes of Loss Forms (Commercial Property)
The ISO Commercial Property program packages causes of loss in three escalating forms:
- Basic Form (CP 10 10) — named perils: fire, lightning, explosion, windstorm/hail, smoke, aircraft/vehicles, riot/civil commotion, vandalism, sprinkler leakage, sinkhole collapse, volcanic action.
- Broad Form (CP 10 20) — Basic perils plus falling objects, weight of ice/snow/sleet, water damage, and building/collapse provisions.
- Special Form (CP 10 30) — open-peril; covers risks of direct physical loss except those excluded.
Theft is covered only under the Special Form (or by endorsement); it is not included in Basic or Broad. A common mnemonic for the Basic perils is WC SHAVERS (windstorm, civil commotion, sprinkler leakage, smoke/sinkhole, hail/aircraft, vandalism, explosion, riot, volcanic action).
Direct vs. Indirect Loss
The exam separates two loss types that the same peril can produce:
- Direct loss — physical damage to covered property from a covered peril (the fire that burns the building).
- Indirect (consequential) loss — the economic loss that follows the direct loss (lost business income while the building is rebuilt, spoilage of refrigerated stock after a power loss).
Property forms cover direct loss by default. Indirect loss requires its own coverage — business income, extra expense, or a spoilage endorsement — because it is a separate insuring agreement, not an automatic extension.
Ensuing Loss and Anti-Concurrent Causation
Many property exclusions contain an ensuing-loss exception: the original excluded peril is not covered, but a covered peril that results from it is. For example, faulty construction is excluded, but if defective wiring causes a fire, the resulting fire damage is covered because fire is a covered ensuing peril.
Contrast this with anti-concurrent causation (ACC) language, which most ISO forms use for flood, earth movement, and ordinance-or-law exclusions. ACC wording states the loss is excluded "regardless of any other cause or event contributing concurrently or in any sequence." That phrasing defeats the ensuing-loss argument for those specific perils: if an excluded flood and a covered wind both contribute, the entire loss is excluded. Distinguishing an ordinary exclusion (which allows ensuing-loss recovery) from an ACC exclusion (which does not) is a frequent advanced question, especially in hurricane wind-versus-flood scenarios.
Why the Trigger Matters in Practice
The named-peril versus open-peril distinction is not academic — it changes who loses an ambiguous claim. On a DP-1 (named peril) a mysterious crack in a foundation is unrecoverable because the insured cannot tie it to a listed peril. On a DP-3 or HO-3 (open peril) the same crack is covered unless the insurer can prove an exclusion such as earth movement or settling applies.
This is also why open-peril premiums are higher: the carrier shoulders the risk of every unexplained or novel cause of loss, while named-peril carriers only insure a finite, listed set of perils they can price precisely. When a question gives you an unexplained or hard-to-prove cause, the form type alone usually decides the answer. Remember the burden never shifts back: even on an open-peril form the insured must still show a direct physical loss occurred — the insurer's burden is only to prove an exclusion, not to disprove the loss itself.
Under an HO-3 dwelling (Coverage A, open-peril) policy, a homeowner files a claim for sudden interior water staining but cannot identify the exact cause. How is the burden of proof handled?
A property owner stores cans of gasoline next to the furnace. This condition is BEST described as: