Causation and Occurrence Analysis

Foundations of Property Loss: Perils and Types of Loss

In property insurance, a peril is a specific cause of loss, such as fire, windstorm, or theft. When an insured peril causes damage, the financial consequences are divided into two main categories: direct loss and indirect loss. A direct loss is physical loss of or damage to property caused by a peril, such as stolen property or a fire-damaged roof. In contrast, an indirect or consequential loss is a financial loss resulting from a direct loss, such as lost business income or extra expense; coverage depends on the policy terms and may not require damage to the insured's own property.

A property insuring agreement identifies the covered property and type of loss. The cause-of-loss terms in the policy specify named perils or provide open-perils coverage subject to exclusions. Named perils policies cover only the perils specifically identified and defined in the policy contract. Open-perils coverage generally insures direct physical loss of or damage to covered property unless the cause is excluded, subject to the policy's other terms. Standard Insurance Services Office (ISO) forms serve as the national reference for these concepts, though insurers may use their own forms and endorsements.

When a loss occurs, the burden of proof differs based on the policy form. In a named-perils claim, you generally must show that a named peril caused the loss, while state law governs specific burdens of proof. In an open-perils claim, you generally must establish direct physical loss of or damage to covered property, while the insurer generally must establish that an exclusion applies, with state law governing specific burdens of proof. To evaluate coverage, an adjuster identifies the damaged property and cause of loss, then applies the policy's coverage terms, exclusions, and conditions.