Property and Casualty Insurance · Property Insurance · 6 min read
Hazards, Perils, and Damage
- Distinguish between perils and hazards, including the three primary types of hazards: physical, moral, and morale.
- Differentiate between direct losses and indirect (consequential) losses, identifying common policy provisions that address each type.
- Explain proximate cause and compare how burden of proof operates under named peril forms versus open-perils forms.
Understanding Perils and Hazards
To understand property insurance, you must first master the distinction between a peril and a hazard. A peril is defined in property insurance as the specific cause of a loss. Common examples of perils include fire, windstorm, hail, lightning, theft, and explosion. When property is damaged or destroyed, the peril is the actual destructive event that produced that outcome.
A hazard is a condition or situation that creates or increases the likelihood or severity of a loss from a peril. A hazard increases the chance or severity of a loss; it may also help start or worsen the event that causes damage. A hazard can help cause or worsen a loss, but the peril is the event that directly causes the damage.
Consider a warehouse where an employee leaves oily rags near an active furnace. The dangerous placement of the rags near heat is a hazard. If a fire starts and consumes the building, the peril is fire. Standard forms developed by Insurance Services Office (ISO) provide common national examples of covered perils, exclusions, and property terms, though insurers may use their own forms and endorsements. Even when an insurer issues its own proprietary form, the basic distinction between a peril and a hazard still applies.
Common mistakes
- Confusing perils with hazards by treating a dangerous condition as the cause of loss rather than the event that created the damage.
- Mixing up moral and morale hazards by forgetting that moral hazards require fraudulent or dishonest intent, whereas morale hazards involve carelessness or indifference.
- Assuming that water damage from firefighting is an indirect loss, when it is actually treated as part of the direct loss from the fire.
- Believing an open-perils policy covers every conceivable loss, overlooking that standard forms exclude perils such as flood, earth movement, war, and inherent vice.
Key points
- A peril is the specific cause of a loss, such as fire, lightning, windstorm, or theft.
- A hazard is a condition that creates or increases the likelihood or severity of a loss from a peril.
- Physical hazards are tangible conditions, moral hazards involve dishonesty or fraud, and morale hazards stem from an attitude of carelessness because insurance exists.
- Direct property loss includes physical damage to, destruction of, or loss of property, such as stolen property; indirect (consequential) loss is a resulting economic or financial loss.
- Indirect-loss coverages include Additional Living Expense for homeowners and business income or extra expense coverage for commercial operations.
- Proximate cause produces a loss through a natural, continuous sequence without an independent intervening cause.
- Named peril policies cover only listed perils with the burden of proof on the insured, whereas open-perils forms cover direct physical loss unless an exclusion applies.
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