Read a loss scenario: peril, hazard and cause

What you will learn

• Separate a peril from physical, moral and morale hazards.
• Distinguish direct damage from its indirect financial consequences.
• Apply a supplied causation rule without inventing policy coverage.
• Distinguish a dangerous condition from a damaging occurrence.

Before you start

Before you start, review Lesson 02: Why insurance works and what it can insure. You can return to those lessons when a term or step is unfamiliar.

Separate what happened from what made it more likely

A shop has a damaged electrical cable. A fire starts and burns its shelving. The shop closes during repairs and loses income. This short story contains several different ideas. The cable's condition, the fire, the damaged shelves and the lost income are not interchangeable. Sorting them helps you answer the question actually asked instead of choosing a familiar insurance word.

Peril is the cause; hazard increases the risk

A peril is a cause of loss, such as fire or theft. A hazard is a condition that increases the chance or severity of a loss. In the shop story, fire is the peril that burns the shelving. The damaged cable is a physical hazard: a tangible condition that makes a loss more likely. A condition can exist without a loss happening. If the cable is repaired before any fire, a hazard was present even though no fire loss occurred.

Three hazard labels answer different questions

Look at the condition and the attitude separately

Jules notices a broken lock but leaves it unrepaired, saying insurance makes the loss unimportant. The broken lock is a physical hazard. The stated indifference because of insurance is a morale hazard. There can be both in one story. Do not infer dishonesty merely from a maintenance problem. If Jules instead plans a dishonest claim, the intentional deception points to moral hazard. Use the facts supplied, not an assumption about the person's character.

Direct damage and the consequences of damage

Direct property loss involves damage, destruction or theft of the property itself. Indirect loss is a financial consequence of that direct loss. In the shop story, burned shelving is direct loss. Income lost while the fire-damaged shop cannot operate is indirect loss. The distinction is not simply 'today versus later': it is property damage versus a resulting financial consequence. Naming an indirect loss does not establish that a particular policy covers it.

Sort one story into four parts

Suppose a poorly secured window makes entry easier. A thief enters, steals a business's equipment and leaves it unable to operate until replacement equipment arrives. The poorly secured window is the physical hazard. Theft is the peril. The stolen equipment is the direct property loss. Resulting lost business income is an indirect loss. If the business loses customers for an unrelated reason instead, that lost income is not a consequence of this theft merely because it occurs during the same week.

Pause and predict

A worn electrical cable starts a fire that damages stock and forces a shop to close. Classify the cable, fire, stock damage and resulting lost income. Now remove the fire and damage: has the dangerous cable alone established a covered loss?

Causation asks which connection matters

A loss can involve a sequence of events or more than one contributing cause. Proximate cause concerns the cause treated as sufficiently significant or legally relevant to the loss, not simply the event mentioned last. Insurance causation rules help decide which cause matters when applying coverage language. First trace what led to what. Then apply the rule the question gives you. Real coverage also depends on the policy and applicable law; a short sequence alone does not settle a disputed claim.

Apply a stated rule, not a guessed rule

For this exercise only, use this rule: choose the event that starts the stated unbroken chain leading to the damage. Lightning strikes a shed, starts a fire, and the fire destroys tools inside. Under that rule, choose the lightning as the initiating cause; the fire is the immediate damaging event. If the question instead asks which peril physically burned the tools, answer fire. The facts did not change. The question did. This exercise rule is not a statement that every Nevada policy must pay for every link in such a chain.

An occurrence describes an accident or harmful exposure

In common insurance usage, an occurrence is an accident, including harmful exposure to conditions, that results in bodily injury or property damage during the policy period. Definitions may also address whether the result was expected or intended. Some policy definitions include repeated or continuous exposure, so do not assume the term always means one brief instant. Read the definition in the policy or question. Identifying an occurrence is not the same as proving coverage or counting how many separate claims are payable.

A dangerous condition is not yet a damaging accident

Suppose a chair has a loose leg but has not injured anyone or damaged anything. That condition is a physical hazard. Now suppose the chair unexpectedly collapses during the stated policy period and breaks a visitor's tablet. The accident and resulting property damage fit the introductory occurrence idea. Whether a specific policy responds remains a separate question. Focus on the change: there is now an accidental event with damage, not merely a condition that could lead to it.

Try new situations before opening the answers

1. A restaurant's cracked door frame makes entry easier. Someone steals its mixer. The restaurant loses income while it cannot prepare its menu. Identify the physical hazard, peril, direct loss and indirect loss.
2. One owner stops taking precautions because insurance exists. Another plans to falsely present deliberate damage as accidental. Which hazard label fits each attitude?
3. Use this exercise rule: choose the event starting the stated unbroken chain. A windstorm pushes a tree onto a garage; the impact destroys the roof. Which event starts the chain? Which event immediately damages the roof?
4. A loose sign is repaired before it falls. Was there a physical hazard? Have the facts supplied an accident resulting in bodily injury or property damage?
5. A neighbor says every event that occurs during a policy period is automatically a covered occurrence. What two ideas has the neighbor confused?

Check your reasoning

What to remember

Ask what increased the risk, what caused the loss, what property was damaged and what financial consequences followed. Keep physical conditions, dishonesty and insurance-related indifference distinct. Trace a cause sequence before applying its stated rule. Read the occurrence definition, and keep identifying an event separate from deciding whether a policy covers it.