3.4 Hazards, Perils, Named vs. Open Perils, Blanket vs. Specific Insurance & Basic Construction Types

Perils, Hazards, and Losses

Exam questions in the Insurance Basics domain (13% of Series 17-62) test vocabulary precisely. A public adjuster also needs this vocabulary to argue coverage correctly.

The Three Hazard Types

1. Physical hazard is a tangible condition of the property or its use: wood-frame construction, knob-and-tube wiring, stored flammables, a restaurant fryer without an automatic suppression system.
2. Moral hazard is a character condition, meaning a tendency toward dishonesty. An insured in financial trouble who sets a fire, or who inflates an inventory, illustrates moral hazard. This is the underwriting basis for the concealment-and-fraud provision in the Standard Fire Policy.
3. Morale hazard (sometimes called attitudinal hazard) is carelessness or indifference because insurance exists: leaving doors unlocked because "the policy will cover it," or failing to heat a vacant building in January.

Adjusting connection: many policy provisions exist to control hazards. Vacancy clauses, protective-safeguards endorsements, increase-in-hazard suspensions, and neglect exclusions are all hazard-control devices. When an insurer invokes one, the public adjuster checks the actual wording and the actual facts. For example, was the building "vacant" as the policy defines it, or merely "unoccupied"?

Named Perils vs. Open Perils

The older term "all risk" is avoided in modern forms because no policy covers every risk. Open-perils forms still exclude flood, earth movement, wear and tear, and many other causes.

Direct vs. Consequential (Indirect) Loss

• Direct loss is physical damage to the property itself caused immediately by the peril: a fire burns the roof.
• Consequential or indirect loss is the financial loss that follows because of the direct damage: lost business income, extra expense, additional living expense, spoilage from a power interruption, or lost rent.

Basic property coverage grants address direct loss. Consequential losses are covered only when the policy adds a time-element coverage (Coverage D in homeowners, Coverages D and E in dwelling forms, and business income forms in commercial lines). Section 3.2 covers the causation doctrines that decide whether a chain of events is still "direct."

Blanket vs. Specific Insurance

• Specific insurance assigns a separate limit to each building, location, or class of property (Building 1: $2,000,000; Building 2: $800,000). A loss at Building 2 is capped at $800,000 even if Building 1 is over-insured.
• Blanket insurance applies one limit across several buildings, locations, or types of property (one $2,800,000 limit covering both buildings and their contents). Blanket limits give flexibility after a large loss at one location. Insurers usually require a statement of values and a higher coinsurance percentage, and they may attach a margin clause that caps recovery for any one location at a percentage of its reported value. See Section 10.2.

Basic Types of Construction

Construction class affects how a fire spreads, how a building is rated, and what repair methods an estimate must include. The Insurance Services Office (ISO) uses six classes:

Why the adjuster cares: a fire in a Class 2 joisted-masonry building often leaves exterior brick walls standing while the interior wood structure is destroyed. The estimate then turns on whether the remaining walls can be reused (engineering, bracing, code review) or must be demolished. That in turn drives ordinance-or-law coverage and valuation arguments. Frame buildings in dense New York neighborhoods raise exposure (adjacent-building) questions and smoke migration between attached structures.