Essential Terminology for Property Insurance
A sudden, unplanned, and unexpected event, not under the control of the insured, resulting in injury or damage that is neither expected nor intended.
Examples:
Key: Sudden & Specific
A broader definition that includes losses caused by continuous or repeated exposure to conditions, not intended or expected.
Examples:
Key: Gradual & Continuous
Exam Tip
Occurrence is BROADER than accident. All accidents are occurrences, but not all occurrences are accidents.
Scenario A - ACCIDENT:
A pipe suddenly bursts in your basement at 2 AM, flooding the entire floor. The damage happens in one dramatic event.
Result: Covered as an ACCIDENT - sudden and unexpected.
Scenario B - OCCURRENCE (not accident):
A pipe has a tiny leak that drips slowly for 6 months. You don't notice until mold grows and damages the wall.
Result: An "occurrence" policy covers this; an "accident-only" policy may NOT.
This is why occurrence-based policies provide broader protection than accident-only policies!
Property insurance can cover two types of losses. Understanding the difference is crucial for the exam!
Physical damage to buildings and/or personal property directly caused by a peril.
Examples:
Covered by: Standard property insurance
Losses that result from a direct loss - usually related to time needed to repair/replace property.
Examples:
Covered by: Additional coverage must be added
Direct loss includes damage where the insured peril was the proximate cause (immediate or actual cause).
Example: Your building catches fire. The fire department uses water to put out the fire, and your walls and floors suffer water damage.
Result: Although water damage is not an insured peril, the damage IS paid under the fire coverage because fire was the proximate cause.
Indirect Loss Example: Extra living expenses - costs to stay in a hotel and eat out while your home is being repaired after a fire.
Indirect Loss Example: Loss of profits - money the business would have made if they hadn't had to close during repairs.
The Setup:
Maria owns "Maria's Bistro," a popular restaurant. A kitchen fire breaks out on a busy Friday night, causing significant damage. The restaurant must close for 3 months for repairs.
DIRECT LOSSES:
Total Direct: $145,000
INDIRECT LOSSES:
Total Indirect: $130,000
Key Point: Standard property insurance covers the $145,000 direct loss. Maria needs BUSINESS INCOME coverage (additional coverage) to recover the $130,000 indirect loss!
A peril is a specific cause of loss. Property policies differ in how they define what perils are covered.
Lists specific covered perils. If a peril isn't listed, it's NOT covered.
Common Named Perils:
If it's NOT listed = NOT covered
Covers any risk of loss that is NOT specifically excluded. Much broader coverage!
Common Exclusions:
If it's NOT excluded = covered
Know This!
The term "Open Peril" replaced "All Risks" because no policy truly covers ALL risks - there are always exclusions.
The Setup:
Tom comes home to find water damage in his ceiling. He doesn't know exactly what caused it - could be a roof leak, could be a pipe issue, could be ice damming. The cause is unclear.
If Tom Has NAMED PERIL Coverage:
Tom must PROVE the damage was caused by one of the listed perils (like "accidental discharge of water"). If he can't prove the exact cause, the claim may be denied.
Burden of proof: ON INSURED
If Tom Has OPEN PERIL Coverage:
The damage is covered UNLESS the insurer can prove it was caused by an excluded peril (like flood or gradual wear). The insurer has the burden to prove an exclusion applies.
Burden of proof: ON INSURER
Exam Tip: Open Peril is more favorable to the insured because the burden of proof shifts to the insurance company!
Negligence is the failure to use the care that a reasonable, prudent person would have used under the same or similar circumstances.
Courts ask: "What would a normal, careful person do in this situation?"
Reasonable:
Salting icy sidewalk in winter
Negligent:
Ignoring icy sidewalk all winter
A store owner knows the floor near the entrance gets slippery when it rains. A customer slips and breaks their arm.
Was the owner negligent? A reasonable store owner would put out "wet floor" signs and mats. If the owner did nothing, they failed to act as a reasonable person would - that's negligence!
These terms matter because many policies restrict or exclude coverage for vacant or unoccupied buildings (usually after 60 days).
No people AND no property in the building for the required period (usually 60 days).
Example:
You sell your house and move out, taking all your furniture. The house sits empty for 2 months before the new owners move in.
Empty building = VACANT
No people in the building, but property IS stored there.
Example:
You go on a 2-week vacation. No one is home, but all your furniture, clothes, and belongings are still there.
Stuff inside, no people = UNOCCUPIED
Memory Trick
Vacant = Vacated completely (people AND stuff gone) | Unoccupied = Un-peopled (just no people, stuff still there)
A single policy that provides coverage for:
Example: A business has 3 warehouses in different cities. One blanket policy covers all inventory in all 3 locations for a total of $1 million - no single item has a specific amount assigned.
Covers a specific kind or unit of property for a specific amount of insurance.
Example: Your homeowners policy might list:
Key Difference: Blanket insurance provides flexibility - if one location has a large loss, the full policy limit can apply. Specific insurance limits payouts to the amount assigned to each item/location.
Accident
Sudden, unplanned event
Occurrence
Broader - includes continuous exposure
Direct Loss
Physical damage to property
Indirect Loss
Consequential (extra expenses, lost income)
Proximate Cause
The immediate/actual cause of loss
Named Peril
Only listed perils covered
Open Peril
Everything covered unless excluded
Negligence
Failure to use reasonable care
Vacant
No people AND no property
Unoccupied
No people, but property stored
Blanket Insurance
One amount covers multiple items/locations
Specific Insurance
Specific amount for specific property