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All risk

What Is All Risk?

All risk, often referred to as "open perils" or "special perils" coverage, is a type of insurance policy that provides coverage for any cause of loss not specifically excluded in the policy contract. This broad form of coverage is a fundamental concept within insurance and risk management, offering a wider net of protection compared to policies that list only specific covered events. Unlike a named perils coverage policy, where the burden of proof rests on the policyholder to show that a loss resulted from a specifically listed peril, an all risk policy generally places the burden on the insurer to prove that the cause of loss is explicitly excluded. The term "all risk" itself can be somewhat misleading because no insurance policy truly covers all possible risks; every policy contains specific exclusions7, 8.

History and Origin

The evolution of "all risk" coverage can be traced to the need for more comprehensive protection against unforeseen events. Historically, insurance contracts were typically written on a named perils basis, specifically enumerating the dangers against which property was insured. As economies became more complex and the nature of potential losses diversified, a demand arose for broader coverage that would automatically include any risk not explicitly excluded. This shift aimed to simplify the insurance process for policyholders and provide greater peace of mind. The International Risk Management Institute (IRMI), a recognized authority in the field, defines "all risks" coverage as property insurance covering loss arising from any fortuitous cause except those specifically excluded, noting that the term has evolved to "open perils" or "special perils" in policy wordings to avoid misinterpretation of absolute coverage5, 6.

Key Takeaways

  • All risk insurance covers any cause of loss unless it is specifically excluded in the policy.
  • It offers broader protection compared to named perils coverage.
  • The burden of proof typically lies with the insurer to demonstrate that a loss falls under an exclusion.
  • Common exclusions in all risk policies include events like war, nuclear hazard, and sometimes earthquake or flood unless added via an endorsement.
  • The term "all risk" is generally being replaced by "open perils" or "special perils" in modern property insurance policies.

Interpreting the All Risk Policy

Understanding an all risk policy centers on its exclusions. Rather than focusing on what is covered, a policyholder should meticulously review the specific perils that are not covered. If a loss occurs and the cause is not listed among the exclusions, then the damage is generally covered. This shifts the interpretive challenge from proving a covered event occurred to demonstrating that a specific exclusion does not apply. For instance, in commercial insurance, an all risk policy might cover damage to inventory from a falling meteor, even if meteor damage isn't explicitly listed, because it's not typically an exclusion. Policyholders should pay close attention to policy language, definitions, and any endorsements that modify the standard exclusions.

Hypothetical Example

Consider a small business owner, Sarah, who runs a boutique furniture store. She purchases an all risk commercial insurance policy to protect her inventory and premises. One night, an unusual incident occurs: a flock of migratory birds, disoriented by heavy fog, crashes into her storefront window, causing significant damage to the glass and a few pieces of furniture inside.

Under her all risk policy, Sarah files a claim. The insurer reviews the policy for any exclusions related to damage caused by birds or unusual animal collisions. If no such exclusion is found, the damage to the window and furniture would typically be covered, even though "bird collision" was not explicitly listed as a covered peril. Sarah would be responsible for her deductible, and the insurer would cover the remaining repair and replacement costs, underscoring the broad protective nature of her all risk coverage.

Practical Applications

All risk policies are widely used across various sectors of the economy due to their comprehensive nature. They are prevalent in homeowners insurance, often referred to as HO-3 or HO-5 forms, which cover the dwelling and personal property against a broad spectrum of perils. In commercial insurance, businesses frequently opt for all risk property policies to protect their assets, including buildings, equipment, and inventory, from diverse potential damages.

This type of coverage is also critical in specialized areas like marine cargo insurance, where goods in transit face numerous unpredictable risks. During the COVID-19 pandemic, the interpretation of "all risk" policies, particularly regarding business interruption insurance, became a significant legal battleground, as businesses sought coverage for losses incurred due to lockdowns and supply chain disruptions. Many policies were tested, and courts, such as those in the UK, clarified the application of certain "at the premises" disease clauses within these broad policies3, 4.

Furthermore, the stability of financial systems can be influenced by the availability and structure of insurance. Academic research from institutions like the Federal Reserve Bank of New York has explored how insurance arrangements affect bank incentives and overall financial stability, particularly in response to events like adverse weather shocks.

Limitations and Criticisms

Despite its name, all risk coverage is not absolute. Its primary limitation stems from its exclusions, which can be extensive and vary significantly between policies. Common exclusions often include:

  • Catastrophic Events: War, nuclear hazard, and sometimes earthquake or flood (though these can often be added via riders or separate policies). For example, most homeowners insurance policies do not cover flood damage, which typically requires a separate policy, often through programs like the National Flood Insurance Program2.
  • Maintenance Issues: Wear and tear, gradual deterioration, rust, mold, and pest infestations are generally not covered as they are considered preventable or maintenance-related issues.
  • Illegal Acts: Damage resulting from illegal activities or fraud by the policyholder.
  • Market Loss: Fluctuations in market value or economic downturns are not insurable perils.

A significant criticism of all risk policies arises when new, unforeseen systemic risks emerge, such as those related to climate change. As the frequency and intensity of natural disasters increase, insurers are re-evaluating their underwriting practices and the scope of their "all risk" offerings. A New York Times investigation revealed that climate change is leading to rising premiums, reduced coverage, and even insurers leaving certain states due to increased losses on homeowners' policies1. This highlights the ongoing challenge for the insurance industry in managing and pricing risks that were once considered rare or localized but are now becoming more widespread and impactful.

All Risk vs. Named Perils Coverage

The key distinction between all risk (or open perils) and named perils coverage lies in their approach to defining covered events and the burden of proof in a claim.

FeatureAll Risk (Open Perils) CoverageNamed Perils Coverage
Coverage ScopeCovers all risks of loss unless specifically excluded.Covers only those perils explicitly listed in the policy.
Burden of ProofInsurer must prove an exclusion applies for a claim to be denied.Policyholder must prove loss resulted from a listed peril.
BreadthGenerally broader and offers more comprehensive protection.Generally narrower; covers only specific, defined events.
CostTypically higher premiums due to broader coverage.Generally lower premiums due to more limited coverage.
Typical UseCommon for property insurance and commercial insurance.Often found in older policies or specific, limited coverage types.

Confusion often arises because policyholders mistakenly believe "all risk" means truly all risks, failing to read the exclusions. Conversely, with named perils, confusion can occur if a cause of loss is not explicitly listed, leading to an uncovered claim even if the policyholder assumed it would be included.

FAQs

What does "all risk" really mean in an insurance policy?

"All risk" means the insurance policy covers any cause of loss to your insured property or interest, except for those specific events or conditions that are clearly listed as exclusions within the policy document. It is not literally "all" risks.

Why do insurers use "open perils" or "special perils" instead of "all risk"?

Insurers prefer "open perils" or "special perils" to avoid implying that every single possible event is covered. This helps manage policyholder expectations and clarifies that certain exclusions always apply.

Are natural disasters always covered by an all risk policy?

Not necessarily. While an all risk policy is broad, specific natural disasters like floods, earthquakes, and sometimes hurricanes in high-risk zones, are often among the standard exclusions. Coverage for these events may require a separate policy or a specific endorsement (rider) to be added to the existing policy, often for an additional premium.

Does an all risk policy cover everything a business might lose?

An all risk commercial insurance policy typically covers physical property losses. It generally does not cover financial losses due to market fluctuations, poor business decisions, or issues like loss of reputation. For financial impacts of physical damage (e.g., lost income after a fire), businesses might need specific riders like business interruption insurance.

How can I find out what is excluded from my all risk policy?

To understand the specific limits of your all risk policy, you must carefully read the policy document, particularly the section detailing "Exclusions" or "Perils Not Covered." If anything is unclear, contacting your insurance agent or provider for clarification is essential.