2.1 Causes of Loss / Named-Peril vs. Open-Peril
Key Takeaways
- Named-peril forms cover only listed causes and place the burden of proof on the insured; open-peril forms cover everything not excluded and place the burden on the insurer.
- ISO grades coverage from Basic (CP 10 10) to Broad (CP 10 20) to Special open-peril (CP 10 30).
- A peril is the cause of loss; a hazard (physical, moral, or morale) increases the chance or severity of a peril.
- Flood and earthquake are excluded on standard property forms and need separate coverage.
- Anti-concurrent-causation language lets insurers deny losses where an excluded peril contributes, even with a covered peril involved.
How Property Policies Define Covered Loss
Every property policy answers one question first: which causes of loss (perils) trigger coverage? A peril is the actual cause of damage, such as fire, windstorm, or theft. A hazard is a condition that increases the chance or severity of a peril, and a proximate cause is the unbroken event that sets the loss in motion. Exam writers test the difference between peril and hazard constantly.
Under the standard ISO (Insurance Services Office) framework, coverage is written on one of two triggers: named-peril or open-peril. The trigger controls who carries the burden of proof when a claim is filed, which is the single most tested concept in this section.
Named-Peril vs. Open-Peril
A named-peril form covers only the causes of loss specifically listed in the policy. If the peril is not named, there is no coverage. The insured bears the burden of proving the loss was caused by a listed peril. ISO publishes graduated named-peril forms: Basic Form (CP 10 10), Broad Form (CP 10 20), and the dwelling equivalents on the DP-1 and DP-2.
An open-peril form (older texts say "all-risk") covers every cause of loss except those specifically excluded. Here the insurer must prove an exclusion applies to deny a claim. The ISO Special Form (CP 10 30) and Homeowners HO-3 (building) and HO-5 (building and contents) are open-peril.
The Three Tiers of Named Perils
Named-peril forms build coverage in layers. The Basic Form typically covers fire, lightning, explosion, windstorm or hail, smoke, aircraft or vehicles, riot or civil commotion, vandalism, sprinkler leakage, sinkhole collapse, and volcanic action. A common mnemonic is "WC SHAVERS" plus fire and lightning.
The Broad Form adds perils such as falling objects, weight of ice/snow/sleet, water damage from plumbing, and building glass breakage. The Special Form then flips the structure entirely to open-peril. Moving up a tier always broadens coverage and raises premium.
Common Exam Traps
- Burden of proof reversal: named-peril = insured proves; open-peril = insurer proves the exclusion. Candidates frequently flip these.
- Flood and earthquake are excluded on virtually all standard property forms regardless of trigger; they require separate policies or endorsements.
- "All-risk" is a deprecated term. ISO now says open-peril because no policy truly covers all risks.
- Peril vs. hazard: an oily rag pile is a hazard; the resulting fire is the peril.
| Form | Trigger | Burden of Proof |
|---|---|---|
| Basic / Broad | Named-peril | Insured |
| Special (CP 10 30) | Open-peril | Insurer |
| HO-3 dwelling | Open-peril | Insurer |
| HO-3 contents | Named-peril | Insured |
Hazards: Physical, Moral, Morale
Three hazard types appear on the exam. A physical hazard is a tangible condition, like worn brakes or stored chemicals. A moral hazard is a dishonest tendency, such as a policyholder who would intentionally cause a loss to collect. A morale hazard (sometimes called attitudinal) is carelessness or indifference because insurance exists, such as leaving doors unlocked.
Underwriters price and accept risk based on hazards, while perils determine what the policy pays for. Keep them distinct: hazards influence probability; perils cause the actual loss.
Under an open-peril property form such as the ISO Special Form (CP 10 30), who carries the burden of proof when a claim is denied?
A homeowner leaves the front door unlocked for weeks because 'insurance will cover any theft.' This carelessness created by the presence of insurance is best classified as which type of hazard?
Doctrine of Concurrent Causation
When a loss results from two or more causes, where one is covered and one is excluded, courts historically applied concurrent causation to find coverage. ISO responded by adding anti-concurrent-causation language to exclusions for flood, earth movement, and ordinance or law. This wording states that the excluded peril is not covered "regardless of any other cause or event contributing concurrently." Expect a question on why a wind-driven flood loss is still denied.
Direct vs. Indirect Loss and Insurable Interest
Property forms also distinguish direct loss from indirect (consequential) loss. A direct loss is physical damage to the property itself, such as a building burning. An indirect loss is the financial consequence that follows, such as lost rental income or extra expense while repairs are made; it is covered only by time-element forms like Business Income (CP 00 30).
Finally, a valid property claim requires insurable interest — a financial stake in the property — that must exist at the time of loss. Without it, the claim fails the principle of indemnity. Exam items often pair a buyer, lender, and tenant and ask who holds insurable interest in the same building.
Why Some Perils Are Excluded
Insurers exclude certain perils because they are catastrophic, uninsurable, or better handled by specialty programs. Standard property forms exclude flood (handled by the National Flood Insurance Program or private flood markets), earth movement including earthquake, war, nuclear hazard, wear and tear, inherent vice, and ordinance or law costs to rebuild to current codes.
These exclusions protect the insurance pool from correlated losses that would strike many policyholders at once, which violates the law of large numbers that makes risk poolable. The exam expects you to recognize that a customer in a flood zone or fault region needs a separate policy or endorsement, and that gradual damage like rot or rust is excluded as maintenance, not an insurable fortuitous event.