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

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.

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.