2.1 Causes of Loss / Named-Peril vs. Open-Peril
Key Takeaways
- A peril is the cause of loss; a hazard (physical/moral/morale) increases the chance or severity of a peril.
- Named-peril forms (Basic CP 10 10, Broad CP 10 20) cover only listed perils — the insured proves the cause.
- Open-peril (Special CP 10 30) covers all direct physical loss unless excluded — the insurer proves the exclusion.
- Open-peril does not erase exclusions (flood, earth movement, war, wear and tear) — it only shifts the burden of proof.
- Anti-concurrent-causation language excludes the entire loss when an excluded peril contributes in any sequence.
Causes of Loss and How Coverage Is Triggered
A peril is the cause of a loss (fire, windstorm, theft). A hazard is a condition that increases the chance or severity of a peril (oily rags = physical hazard; arson for profit = moral hazard; carelessness from over-reliance on insurance = morale hazard). The exam tests this chain constantly: hazards are not perils, and the policy never pays for a hazard — it pays for the loss the hazard helped cause.
Property policies define what is covered through one of two structures. The distinction between them — and which party carries the burden of proof — is one of the most heavily tested ideas on the national portion.
Named-Peril vs. Open-Peril
Under a named-peril form, coverage applies only to the perils specifically listed. The insured must prove the loss was caused by a listed peril. ISO standardizes these triggers through the Causes of Loss forms:
- Causes of Loss – 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. (Mnemonic: WCSHAVVERS + fire/lightning/explosion.)
- Causes of Loss – Broad Form (CP 10 20) — Basic perils plus falling objects, weight of ice/snow/sleet, water damage (accidental discharge), building glass breakage, and collapse (as an additional coverage).
- Causes of Loss – Special Form (CP 10 30) — open-peril (“all-risk”): covers risk of direct physical loss unless excluded. The insurer must prove an exclusion applies to deny a claim.
Open-peril is the broadest and most expensive structure precisely because it shifts the burden of proof to the carrier.
Comparing the Two Structures
| Feature | Named-Peril (Basic/Broad) | Open-Peril (Special) |
|---|---|---|
| Coverage scope | Only listed perils | All direct physical loss unless excluded |
| Burden of proof | Insured proves listed peril caused loss | Insurer proves an exclusion applies |
| Relative premium | Lower | Higher |
| ISO form | CP 10 10 / CP 10 20 | CP 10 30 |
| Theft coverage | Not in commercial Basic/Broad | Included (subject to exclusions) |
Trap: Many candidates assume open-peril = covers everything. It does not. Standard exclusions (flood, earth movement, war, wear and tear, ordinance or law, nuclear hazard, intentional acts) survive under Special Form too — “open-peril” only flips the burden of proof, it does not erase exclusions.
Proximate Cause and Concurrent Causation
Property insurance pays when a covered peril is the proximate cause — the unbroken chain of events leading to loss. If fire (covered) causes a water-line burst and resulting water damage, both are covered because fire set the chain in motion.
Anti-concurrent-causation (ACC) language in modern forms states that if an excluded peril (e.g., flood or earth movement) contributes to a loss — in any sequence, with or without a covered peril — the entire loss is excluded. This is why hurricane wind (covered) plus storm surge (excluded flood) litigation turns on ACC wording.
Under the Causes of Loss – Special Form (CP 10 30), which party bears the burden of proof when a claim is filed?
An oil-soaked rag left near a furnace is BEST described as which of the following?
Direct vs. Indirect Loss and Why It Matters
Property coverage separates direct loss (physical damage to the property itself — the burned building) from indirect (consequential) loss (the financial fallout — lost business income, extra expense, additional living expense while the building is unusable). Standard property forms cover direct loss; time-element coverage (business income, ALE) must be added or built in to capture the indirect loss.
| Loss type | Example | Where covered |
|---|---|---|
| Direct | Fire destroys inventory | Building/BPP, dwelling property forms |
| Indirect (time element) | Store closes 3 months, loses profit | Business income / extra expense |
| Indirect (personal lines) | Family must rent during repairs | Additional living expense (HO Coverage D) |
Trap: a named-peril form that covers fire as a direct loss does not automatically pay lost income — that consequential loss requires time-element coverage triggered by a covered direct loss.
A covered fire forces a retail store to close for repairs, and the owner loses three months of profit. Under what type of coverage is that lost profit paid?
Exam Tactics for Cause-of-Loss Questions
When a question describes a loss, work through this checklist: (1) Identify the structure — is the form named-peril (Basic/Broad) or open-peril (Special)? (2) Locate the burden of proof — named-peril puts it on the insured; open-peril puts it on the insurer. (3) Screen for exclusions that survive even under open peril. (4) Check anti-concurrent-causation language if an excluded and a covered peril combine.
Classic distractors and how to beat them:
- "Open peril covers everything." False — exclusions (flood, earth movement, war, wear/tear, ordinance/law, nuclear, intentional acts) remain.
- "Theft is covered under the Basic commercial form." False — commercial Basic/Broad omit theft; it appears in the Special form.
- "A hazard is a peril." False — the policy never pays for a hazard; it pays for the loss the hazard contributed to.
- "Resulting water damage from a covered fire is excluded." False — fire is the proximate cause and sets a covered chain in motion.
Mastering this sequence — structure, burden, exclusions, causation — lets you answer most property-trigger items quickly and correctly.
Quick Recap of the Causes-of-Loss Framework
Before answering any property-trigger question, run the sequence: identify the structure (named-peril Basic/Broad versus open-peril Special), locate the burden of proof (insured under named-peril, insurer under open-peril), screen for surviving exclusions even under open peril, and apply anti-concurrent-causation when an excluded and a covered peril combine.
Keep the peril-versus-hazard chain straight: a hazard increases the chance or severity of a peril but is never itself paid. The Basic form omits theft and water damage; the Broad form adds them plus collapse; the Special form flips the burden to the insurer. These reference points resolve the large majority of cause-of-loss items.