2.1 Causes of Loss / Named-Peril vs. Open-Peril
Key Takeaways
- A peril is the cause of loss (fire, wind, theft); a hazard increases the chance or severity of a peril; the three hazard types are physical, moral, and morale.
- Named-peril (specified-peril) coverage pays only for perils listed on the form; the burden of proof is on the insured to show the loss came from a listed peril.
- Open-peril (all-risk / special-form) coverage pays for any direct physical loss except those excluded; the burden of proof shifts to the insurer to prove an exclusion applies.
- ISO Causes of Loss forms for commercial property are CP 10 10 (Basic), CP 10 20 (Broad), and CP 10 30 (Special); HO-3 insures the dwelling open-peril and contents named-peril, while HO-5 insures both open-peril.
- Ordinance or Law, flood, earth movement, war, nuclear hazard, and wear-and-tear are excluded under open-peril forms and must be added back by endorsement where available.
Perils, Hazards, and the Cause of Loss
Property insurance is built around the cause of loss. The exam expects you to separate three terms that students constantly blur.
- Peril — the actual cause of a loss (fire, windstorm, theft, vandalism, lightning).
- Hazard — a condition that increases the likelihood or severity of a peril.
- Loss — the reduction in value that results when a peril strikes.
There are three classes of hazard, each a likely test item.
| Hazard type | Definition | Example |
|---|---|---|
| Physical hazard | A tangible condition of the property or person | Oily rags in a basement; an icy sidewalk |
| Moral hazard | Dishonesty or character that invites loss | An insured who burns property to collect |
| Morale hazard | Carelessness or indifference because insurance exists | Leaving doors unlocked because contents are insured |
The distinction: a moral hazard involves intent to cause loss; a morale hazard is mere carelessness. Underwriters decline or surcharge for moral hazard; morale hazard is managed with deductibles and coinsurance.
Named-Peril vs. Open-Peril Coverage
Every property form is one of two coverage triggers, and the burden of proof flips between them — the single most tested concept in this section.
| Feature | Named-peril (specified peril) | Open-peril (all-risk / special) |
|---|---|---|
| What is covered | Only perils listed on the form | Any direct physical loss not excluded |
| Burden of proof | Insured proves loss is from a listed peril | Insurer proves an exclusion applies |
| Premium | Lower | Higher (broader) |
| ISO commercial form | CP 10 10 Basic / CP 10 20 Broad | CP 10 30 Special |
| Homeowners example | HO-2 (broad); HO-3 contents | HO-3 dwelling; HO-5 (both) |
Trap: "all-risk" does not mean "all losses." Open-peril forms still contain a long exclusions list; the term was largely replaced by "special form" or "open perils" to stop consumers reading it as unlimited.
ISO Causes of Loss Forms (Commercial Property)
A commercial property policy attaches one Causes of Loss form to the CP 00 10 Building and Personal Property Coverage Form:
- CP 10 10 – Basic Form: fire, lightning, explosion, windstorm/hail, smoke, aircraft/vehicles, riot/civil commotion, vandalism, sprinkler leakage, sinkhole collapse, volcanic action. Mnemonic device on the exam: "WCSHAVVERS" family of basic perils.
- CP 10 20 – Broad Form: Basic perils plus falling objects, weight of ice/snow/sleet, water damage (accidental discharge), and building glass breakage.
- CP 10 30 – Special Form: open-peril — covers risks of direct physical loss unless excluded.
Standard Open-Peril Exclusions
Because an open-peril form covers everything not excluded, the exclusions page is the coverage page. The recurring exam exclusions are:
- Ordinance or Law — extra cost to rebuild to current building codes (add back with CP 04 05 / HO ordinance endorsement).
- Earth movement — earthquake, landslide, sinkhole subsidence (separate earthquake form CP 10 40 / DIC).
- Flood and surface water — covered only by NFIP or private flood, never the homeowners or standard CP form.
- War and nuclear hazard.
- Wear and tear, deterioration, inherent vice, latent defect — maintenance items, not fortuitous losses.
- Governmental action, intentional loss, and mechanical breakdown.
Many of these are anti-concurrent causation exclusions: if an excluded peril (flood) and a covered peril (wind) combine, the policy language can bar the entire loss — the basis of much post-hurricane litigation.
Direct vs. Indirect (Consequential) Loss
Property forms separate direct loss — physical damage from the peril itself, such as fire consuming a building — from indirect or consequential loss, the financial loss that follows, such as lost rents or business income while the building is rebuilt. The exam tests that indirect coverage (Fair Rental Value, Additional Living Expense, Business Income) responds only after a covered direct loss triggers it, and only for the period of restoration. No covered direct loss means no indirect payment, regardless of how real the lost income feels.
Concurrent Causation and Anti-Concurrent Causation
When two perils combine to cause one loss and one is covered, one excluded, the courts once forced coverage under the concurrent causation doctrine. Insurers responded with anti-concurrent causation (ACC) language: "We do not pay for loss caused directly or indirectly by [the excluded peril], regardless of any other cause or event contributing concurrently or in any sequence." The classic application is flood plus wind in a hurricane, or earth movement plus a covered peril. Under ACC wording, if the excluded peril is in the causal chain, the loss is excluded even though a covered peril also contributed.
This is one of the most heavily tested property concepts.
Ensuing Loss and the Sequence Rule
Many exclusions contain an ensuing-loss exception that restores coverage for a covered peril that results from an excluded one. Example: faulty workmanship is excluded, but if defective wiring (excluded faulty work) causes a fire, the resulting fire damage is covered because fire is the ensuing covered peril. Distinguish this from ACC: ensuing-loss clauses add back a covered consequence, while ACC language removes coverage when an excluded peril is anywhere in the chain.
On the exam, read the sequence carefully: covered-peril-then-excluded-result is excluded; excluded-cause-then-covered-ensuing-peril is usually covered. The single keyword distinguishing the two is whether the final, resulting peril is itself covered.
Under an open-peril (special form) commercial property policy, who carries the burden of proof when a claim is filed?
An insured leaves the front door unlocked routinely because 'the contents are insured anyway,' and a theft occurs. This attitude is an example of what?