2.2 Perils, Hazards, and Exclusions

Peril vs. Hazard — Define Both

A peril is the cause of a loss (fire, wind, theft). A hazard is a condition that increases the chance or size of a loss. The exam separates three hazard types:

Named Perils vs. Open Perils

This distinction controls coverage scope and, critically, who must prove what.

Named Perils (Basic Form / Broad Form)

Covers only the perils specifically listed. The insured bears the burden of proof — they must show the loss came from a listed peril. Common named perils include:

• Fire and lightning
• Windstorm and hail
• Explosion; smoke
• Vandalism and malicious mischief
• Theft
• Falling objects; weight of ice, snow, or sleet
• Accidental discharge of water from plumbing (not flood)
• Volcanic eruption

Open Perils (Special Form / All-Risk)

Covers all causes of loss except those excluded. The insurer bears the burden of proof — to deny a claim it must show an exclusion applies. Open perils costs more and provides broader protection.

Scenario: A meteor punches through a roof. Under named perils, the insured must find "meteor" or "falling objects" on the list or recover nothing. Under open perils, it is covered unless specifically excluded.

Standard Exclusions

Nearly every property policy excludes the same categories. Memorize these — exclusions generate a large share of property questions.

The Flood Exclusion (Heavily Tested)

Flood is never covered by a standard property policy, even when a covered peril (a hurricane) caused the flooding. Flood is excluded because it is a correlated, catastrophic risk subject to adverse selection.

How to get flood coverage:

• National Flood Insurance Program (NFIP) — the federal program. Maximum residential limits are $250,000 building and $100,000 contents.
• Private flood insurance — increasingly available and can exceed NFIP caps.

The Earthquake Exclusion

Earthquake is also excluded and is added by endorsement or a separate policy. The defining feature is the percentage deductible, typically 10-20% of the dwelling limit rather than a flat dollar amount. On a $400,000 home, a 15% earthquake deductible is $60,000 — far larger than an ordinary deductible. California residents typically buy through the California Earthquake Authority (CEA).

Concurrent Causation and Anti-Concurrent-Causation

When a covered peril and an excluded peril combine to cause one loss, the concurrent-causation doctrine historically allowed recovery if any contributing cause was covered. Insurers responded with anti-concurrent-causation (ACC) clauses: if an excluded peril contributes to the loss in any way, the entire loss is excluded.

Worked example: A hurricane produces both wind damage (covered) and storm-surge flood damage (excluded). Under ACC wording, where wind and flood acted together the loss is excluded; the standard claims approach is to separate and document the wind-only damage so that portion can be paid while the flood portion is denied. Careful documentation of each cause is the practical takeaway.

Coverage Forms: Basic vs. Broad vs. Special

The exam expects you to rank the three cause-of-loss forms used in both homeowners and commercial property. Basic Form is the narrowest named-perils list, traditionally fire, lightning, windstorm, hail, explosion, smoke, aircraft, vehicles, riot, vandalism, sinkhole collapse, and volcanic action. Broad Form adds the second tier of named perils — falling objects; weight of ice, snow, or sleet; accidental discharge of water or steam; freezing of plumbing; and sudden tearing or cracking of a heating or air-conditioning system. Special Form is open perils: everything is covered unless excluded.

As coverage widens from Basic to Broad to Special, premium rises and the burden of proof shifts from the insured toward the insurer.

Why Certain Risks Are Not Insurable

Exclusions are not arbitrary; they trace back to the characteristics of an insurable risk. A loss should be definite and measurable, fortuitous (accidental), not catastrophic to the insurer, calculable, and affordable. Flood and earthquake violate the non-catastrophic characteristic because a single event strikes thousands of insureds at once (correlated loss). Intentional acts violate the fortuitous characteristic — the insured controls whether the loss happens, creating moral hazard. Wear, tear, rust, and gradual deterioration violate the accidental characteristic because they are expected and certain, not sudden.

War and nuclear hazard are simply beyond the financial capacity of any private insurer. Tying each exclusion back to a failed insurability characteristic lets you reason through unfamiliar scenarios rather than memorize a list.

Ordinance or Law — A Frequently Tested Gap

Even open-perils policies exclude the extra cost of complying with building ordinances or laws when rebuilding. After a covered fire, a 40-year-old building may have to be brought up to current code (new wiring, fire sprinklers, accessibility). The base policy pays only to restore the building as it was; the increased cost of construction to meet code is excluded unless the insured buys an ordinance or law endorsement. This pairs naturally with functional replacement cost and is a classic distractor on commercial property questions.