Cause of Loss Forms – Essential Coverage Options in Commercial Property Insurance
Many business owners fail to understand that not all property insurance policies cover every possible event that might damage or destroy their property.
TL;DR
- Cause of loss forms are documents that specify what perils or causes of loss a commercial property insurance policy covers.
- Understanding these forms can help insurance professionals guide clients in choosing the right coverage for their needs.
- The most common misunderstanding is the degree of coverage between basic, broad, and special forms.
- The best practice for agencies is to thoroughly explain these forms to clients to prevent potentially devastating coverage gaps.
What Is Cause of Loss Forms in Insurance?
When your client asks, “What’s covered in my commercial property insurance?” you can answer: It depends on your “cause of loss form”. This is an insurance document that details what your policy does and doesn’t cover when it comes to damage to commercial property.
For insurance professionals, cause of loss forms are key to outlining the scope of coverage under a commercial property policy. They detail specific scenarios, or “perils”, under which a policy will reimburse a policyholder for damages. They’re usually categorized as basic, broad, or special forms.
Key Related Terms to Know
- Cause of Loss – specific event that triggers coverage under an insurance policy.
- Named Perils – named perils and the basic perils list include only those risks or causes of loss specifically listed in the policy.
- Basic Form – a type of insurance coverage that includes a specific list of perils.
- Broad Form – includes everything in the basic form and expands the list of covered perils.
- Special Form – offers the most comprehensive coverage, often referred to as “all risk” or “open perils coverage”, as it covers everything except what is specifically excluded.
- ISO Forms – used by the Insurance Services Office, these standardized forms like the CP 10 10 and CP 10 30, outline coverage options.
Common Questions About Cause of Loss Forms
How does basic form differ from broad form and special form?
Basic form coverage perils are the least extensive, covering just the basics like fire, explosion, and hail. Broad form includes all basic coverage perils and adds additional perils such as water damage, falling objects, and weight of snow, ice, or sleet. The special cause of loss form provides the broadest coverage, covering all risks or perils unless explicitly excluded in the policy.
What are some common exclusions on special cause of loss forms?
Typically, the special causes of loss form excludes perils like flood, earthquake, war, nuclear hazard, intentional damage caused by the insured, and normal wear and tear, among others.
Is “Special Form” the same as “All-Risk” Coverage?
Special form is often equated with all-risk coverage. However, while they provide broad coverage, neither is truly “all-risk” because each contains exclusions.
How do I decide which cause of loss form is right for my client?
This often depends on the individual risk characteristics of the client and their tolerance for risk. However, the only sure way is to discuss the options with the client, understand their needs, and match those to the best policy.
Cause of Loss Forms vs. Named Perils Coverage
The primary difference between these two lies in the coverage. Cause of Loss Forms lay the foundation for the covered perils under a commercial property insurance policy. Named perils coverage, in contrast, only covers the specific causes of loss listed in the policy.
Comparison Area | Cause of Loss Forms | Named Perils Coverage
|
Coverage / concept type | Outlines what is covered in the policy | Only the specified perils are covered |
Typical exclusions | Depends on the form (Basic, Broad, Special) | All except the named perils |
Common mistake | Assuming too many perils are covered | Overlooking unnamed perils with potential risk |
Real Claim Examples Involving Cause of Loss Forms
Scenario 1: A restaurant owner has a Basic form that covers fire, yet a kitchen fire still occurs. Unfortunately, after investigating the claim, the insurer determines that the fire resulted from a neglected grease trap, a hazard not covered under the basic form insurance. This leaves the restaurant owner bearing the loss.
Scenario 2: A retail store with a Broad form policy suffers damage due to a burst water pipe in the ceiling. Because the Broad form includes damage from accidental release of water as a covered cause of loss, the store owner receives compensation for the damages.
Scenario 3: An office building covered under a special cause of loss form is vandalized without provocation. Even though the damage wasn’t anticipated, since it is not specifically excluded under the Special form, the policy covers the damage.
Limitations and Common Mistakes
When it comes to cause of loss forms, common pitfalls include:
- Assuming that all forms cover all possible losses.
- Ignorance of the basic coverage perils included in Basic Form.
- Overlooking important exclusions in the Special form.
- Failure to fully clarify exposures for risk-prone properties like
How to Explain Cause of Loss Forms to Clients
Personal Lines client: “Think of it like this: Cause of Loss Forms are simply a list of specific occasions or events under which your policy will cover you. There are different levels, with Basic covering a few, Broad covering more than Basic, and Special covering the most except for specific exclusions.”
Small Business owner: “Your Cause of Loss Form is like your business plan for unwanted events. If such a specified event happens and leads to property damage, your insurance is there to cover you.”
CFO or Risk Manager: “Your company’s risk exposure goes hand in hand with the Cause of Loss Forms your company chooses. Essentially, these forms define the ‘rules of the game’ in case of property damage claims.”