Causes of Loss Basic and Broad Forms

Study guide: Exam DISC-IA

The Causes of Loss – Basic Form and Broad Form are the two named perils options of the ISO commercial property program (CP 10 10 and CP 10 20). Attached to a coverage form such as the BPP, each defines the covered causes of loss as a list: the basic form names eleven perils, and the broad form names the same eleven plus falling objects, weight of snow, ice or sleet, and water damage, and adds an additional coverage for collapse. Both then exclude a common set of causes and add limited coverage for fungus, wet rot, dry rot and bacteria.

\begin{aligned} N_{\text{basic}} = \{&\text{fire, lightning, explosion, windstorm or hail,} \\ &\text{smoke, aircraft or vehicles, riot or civil commotion,} \\ &\text{vandalism, sprinkler leakage, sinkhole collapse,} \\ &\text{volcanic action}\} \end{aligned}

\begin{aligned} N_{\text{broad}} = N_{\text{basic}} \cup \{&\text{falling objects, weight of snow, ice or sleet,} \\ &\text{water damage}\} \end{aligned}

\text{Covered}(c) \iff c \in N \ \text{and}\ c \notin E

• Symbols: N is the list of named perils in the form attached, E is the set of excluded causes and c is the cause of a particular loss. The insured has to show that a named peril caused the loss; anything not on the list, such as theft, is not covered. The open perils alternative is the special form, and the general idea is on Causes of Loss.
• The basic perils and their limits: The definitions below are paraphrased from CP 10 10 10 12, section A.
  • Explosion includes explosion of gases or fuel in a furnace or its flues, but not rupture or bursting of pressure-relief devices or of a building's contents swelling from water.
  • Windstorm or hail does not include frost or cold weather; ice (other than hail), snow or sleet; damage to the interior or contents by rain, snow, sand or dust unless wind or hail first damages the roof or walls and it enters through the opening; or hail damage to a vegetated roof.
  • Smoke must cause sudden and accidental damage, and excludes smoke from agricultural smudging or industrial operations.
  • Aircraft or vehicles means physical contact with the property or the building containing it, including objects falling from aircraft, but not vehicles the insured owns or that are operated in the course of its business.
  • Riot or civil commotion includes acts of striking employees occupying the premises and looting at the time and place of a riot.
  • Vandalism is willful and malicious damage, but not theft, except building damage caused by burglars breaking in or out.
  • Sprinkler leakage is leakage or discharge from an automatic sprinkler system, including collapse of its tank. If the building is covered property, the form also pays to repair the system when the damage results in leakage or is caused by freezing, and to tear out and replace part of the building to repair it.
  • Sinkhole collapse is sudden sinking of land into spaces water has dissolved in limestone or dolomite, but not filling the sinkhole or collapse into man-made cavities.
  • Volcanic action is damage from airborne blast or shock waves, ash, dust or particulate matter, or lava flow. All eruptions within 168 hours are one occurrence, and removing ash that caused no damage is not covered.
• The broad form's additions: These are paraphrased from CP 10 20 10 12, section A.
  • Falling objects, but not personal property in the open, or a building's interior or contents unless the roof or an outside wall is first damaged by the falling object.
  • Weight of snow, ice or sleet, but not personal property outside buildings or a vegetated roof.
  • Water damage, meaning accidental discharge or leakage of water or steam as the direct result of a plumbing, heating, air conditioning or other system or appliance on the premises breaking apart or cracking. It excludes discharge from a sprinkler system, a sump or roof drains and gutters, the cost to repair the defect itself, seepage over 14 days or more, and freezing unless the insured did its best to maintain heat or drained the system. It pays to tear out and replace part of the building to repair the system.
• Exclusions in both forms, regardless of any other cause: ordinance or law; earth movement, with fire or explosion that follows it covered; governmental action, except destruction ordered to stop a covered fire from spreading; nuclear hazard, with ensuing fire covered; failure of utility service originating away from the premises, with an ensuing covered cause covered; war and military action; water, meaning flood, mudslide, sewer or sump backup and underground water, with ensuing fire, explosion or sprinkler leakage covered; and fungus, wet or dry rot and bacteria. These apply whatever other cause contributes concurrently or in any sequence.
• Further exclusions: Both forms exclude artificially generated electrical current (with ensuing fire covered), explosion of the insured's steam boilers (with ensuing fire or combustion explosion covered), mechanical breakdown and neglect to protect property after a loss. The basic form also excludes rupture of water pipes and leakage from water or steam systems unless caused by a covered cause of loss, which is the gap the broad form's water damage peril fills. Special exclusions limit the business income, leasehold interest and legal liability coverage forms.
• Additional coverages: Both forms pay up to $15,000 in a 12-month period for fungus, wet or dry rot or bacteria resulting from a covered cause of loss other than fire or lightning, including tear-out and testing, within the limit of insurance. Only the broad form adds collapse: abrupt collapse of a building caused by a named peril or breakage of building glass, hidden decay or hidden insect damage not known to the insured, the weight of people or personal property, the weight of rain collecting on a roof, or defective construction methods during construction. A building merely in danger of collapse, or still standing though cracked or sagging, is not covered, and the coverage does not increase the limits.
• Limitation: Under both forms, animals are covered only if killed or their destruction is made necessary.

One Year of Losses Under Each Form A distributor has four losses: (1) a pipe in the office cracks and leaks, causing $18,000 of water damage to stock, $1,400 to tear out a wall to reach the pipe, and $600 to repair the pipe itself; (2) on a calm day, a tree that a contractor is cutting down falls through the roof, causing $9,000 to the roof and $4,000 to stock below; (3) its own delivery truck backs into the loading dock wall, causing $5,500; (4) burglars break the door ($2,500) and steal $10,000 of stock. Ignoring deductibles, what is covered under the basic form and under the broad form?

Answer Under the basic form, the pipe leak is excluded because the system was not damaged by a covered cause of loss. The tree is not windstorm or any other basic peril. The truck is a vehicle the insured owns. Only the burglars' building damage is vandalism, and the theft is excluded.

\begin{align*}
\text{Basic} &= 2{,}500 \\
\text{Broad} &= 2{,}500 + (18{,}000 + 1{,}400) + (9{,}000 + 4{,}000) \\
&= 34{,}900
\end{align*}

The broad form adds water damage, including the tear-out but not the $600 repair of the defective pipe, and falling objects, which covers the stock because the roof was damaged first. Neither form covers the insured's own truck or the $10,000 theft; theft needs the special form.

A Roof Collapse From Rain After a heavy storm, water ponds on a flat roof and its weight brings part of the roof down, ruining $30,000 of equipment below. The roof repair costs $45,000. Wind did not damage the roof. Which form covers the loss?

Answer The cause is the weight of rain collecting on the roof. That is not windstorm, and rain entering a building whose roof wind has not damaged is outside the windstorm peril, so the basic form pays nothing. The broad form's collapse additional coverage covers abrupt collapse caused by the weight of rain that collects on a roof, so it pays the $75,000, within the limits of insurance. Had the roof only sagged without falling in, collapse coverage would not apply.

How it appears on the exam

• DISC-IA: The objective covers the causes of loss basic form and broad form. Questions describe a loss and ask whether a named peril covers it, which form is the least that would, or which exclusion removes it.
• Peril definitions: Many questions turn on a definition's limits: the insured's own vehicle, theft dressed up as vandalism, interior rain without roof damage, or water damage from a sump or gutter.

Exam traps

• Theft is not named: Neither form covers theft. Vandalism covers only the building damage burglars cause getting in or out.
• Your own vehicles: The aircraft or vehicles peril excludes vehicles the insured owns or operates in its business, so a forklift or delivery truck hitting the building is not covered.
• Broad adds three perils and collapse: Falling objects, weight of snow, ice or sleet, and water damage are the only perils the broad form adds; collapse is an additional coverage, not a fourth peril.
• Water damage is not flood: The broad form's water damage peril is a burst or cracked system on the premises. Flood, sewer backup and underground water stay excluded under every form.
• The defect itself: Water damage pays for what the water ruins and the tear-out to reach the system, never the repair of the cracked pipe or appliance.