Perils, Hazards & Causes-of-Loss Forms

Perils and Hazards

A peril is the actual cause of a loss — fire, lightning, windstorm, theft, explosion. A hazard is a condition that increases the likelihood or severity of a loss arising from a peril. The exam tests three hazard types:

• Physical hazard: a tangible condition — oily rags in a basement, a worn tire, an icy walkway.
• Moral hazard: dishonesty or a deliberate tendency, such as an insured who would burn property to collect.
• Morale hazard: indifference or carelessness because insurance exists — leaving doors unlocked because "it's covered."

Distinguishing peril from hazard is a frequent trap: the icy sidewalk is a hazard; the fall it causes leads to the loss.

Named-Peril vs. Open-Peril Forms

Property coverage forms come in two structures, and the difference controls what is covered and who must prove the claim.

• Named-peril forms (called basic and broad) cover loss only from perils specifically listed in the policy. If the peril is not on the list, there is no coverage.
• Open-peril forms (called special or, traditionally, all-risk) cover all direct physical loss to the property except losses caused by perils the policy specifically excludes.

Open-peril is broader because everything is covered unless excluded, so the insured does not have to find their cause of loss on a list.

Burden of proof — the most tested distinction

This shift is the reason open-peril coverage is more valuable and more expensive. Under named-peril, a loss of unknown cause is not covered — the insured cannot tie it to a listed peril. Under open-peril, that same mystery loss is covered unless the insurer can point to an exclusion.

Common Named Perils

Named-peril forms build coverage from a list. The basic form covers a core set; the broad form adds several more. Candidates should recognize the classic perils tested on dwelling and homeowners forms:

• Basic-form core perils: fire, lightning, windstorm and hail, explosion, riot and civil commotion, aircraft, vehicles, smoke, vandalism and malicious mischief, and (on dwelling) volcanic eruption.
• Broad-form additions: falling objects; weight of ice, snow, or sleet; accidental discharge of water or steam; freezing of plumbing; sudden and accidental tearing or burning of a heating/AC system; and damage from artificially generated electrical current.

A memory cue some candidates use for the early dwelling perils is the "fire/lightning/windstorm/hail/explosion" cluster; the broad form is mostly water- and weight-related additions.

Reading a peril question carefully

Named-peril questions hinge on whether the cause is on the list. A water-discharge loss from a burst supply pipe is a broad-form peril, so a basic form would not cover it but a broad form would. Freezing of plumbing is covered only if the insured maintained heat or drained the system — a built-in condition the exam likes to test.

Watch for distractors that swap a covered peril for an excluded one. Wind-driven rain entering through a wind-created opening is covered; rain entering through an existing gap is not. Smoke from a hostile fire is covered; smoke from agricultural or industrial operations is excluded. Reading the precise cause of loss, not just the category, is the skill these questions reward.

How the special form shifts proof to the insurer

The practical power of the open-peril (special) form is procedural. On a named-peril form, after a loss the insured files proof tying the damage to a listed peril; if they cannot, the claim fails by default. On a special form, the insured need only show direct physical loss occurred, and the claim is presumed covered.

To deny, the insurer must affirmatively identify and prove an applicable exclusion — flood, earth movement, wear and tear, and so on. This reversal is why special-form losses of ambiguous origin tend to be paid: the insurer carries the harder evidentiary burden. The exam frames this as the single most important reason an open-peril policy is worth its higher premium.

Direct vs. Indirect Loss and Standard Exclusions

Direct loss is the immediate physical damage to covered property — the fire that consumes the structure. Indirect (consequential) loss is the financial loss that follows from the direct loss — the rent the owner cannot collect, or the extra cost of living elsewhere while the home is rebuilt. On dwelling and homeowners forms, indirect loss is covered through fair rental value, loss of use, and additional living expense.

Certain perils are excluded on both named and open forms because they are catastrophic, uninsurable, or covered elsewhere:

• Flood / surface water — covered separately under the NFIP, not the standard property policy.
• Earth movement — earthquake, landslide, sinkhole; needs an endorsement or separate policy.
• War and nuclear hazard — considered uninsurable catastrophes.
• Wear and tear, deterioration, inherent vice — maintenance items, not fortuitous losses.
• Ordinance or law — extra cost to rebuild to current building codes (a limited endorsement adds it back).
• Intentional loss by the insured.

Because these exclusions appear on the special form too, an open-peril policy is not truly "all risk" — it is "all risk except the listed exclusions."