What Is All Risk Insurance?
All Risk Insurance, often referred to as "open perils" or "special perils"49, is a type of insurance policy within the property and casualty insurance sector that provides coverage for any risk of loss or damage, except for those specifically excluded in the policy contract. This contrasts with "named perils" policies, which only cover risks explicitly listed. For an All Risk Insurance policy, if a particular peril is not mentioned in the exclusions section, it is generally considered covered. This broad approach aims to offer comprehensive protection, simplifying the claims process for the policyholder as they do not need to prove the specific cause of a loss, only that the loss occurred and is not an exclusion47, 48.
History and Origin
The concept of insurance itself dates back millennia, with early forms like bottomry contracts in ancient Babylon and Greece protecting merchants against maritime losses45, 46. Modern property insurance began to take shape after significant events, such as the Great Fire of London in 1666, which highlighted the devastating impact of unforeseen disasters and spurred the development of more formalized fire insurance companies44.
Over time, insurance policies evolved from highly specific "named perils" agreements, where only explicitly listed dangers were covered, to the broader "all risk" approach. This evolution reflects an industry shift towards providing more encompassing protection against a wider array of potential losses. While the term "all risk" might suggest limitless coverage, the industry has moved away from using the exact phrase "all risks" in policy documents due to concerns that it implies an absolute, unlimited scope42, 43. Insurers now prefer "open perils" or "special perils" to accurately represent that while coverage is broad, it is still subject to stated exclusions41. The expansion of insurable risks and the sophistication of underwriting practices have been continuous, driven by economic changes and evolving understanding of risk39, 40.
Key Takeaways
- All Risk Insurance covers losses from any cause not specifically excluded in the policy.
- It offers broader protection compared to a "named perils" policy, where only listed dangers are covered.
- The burden of proof in an All Risk Insurance claim typically shifts to the insurer to demonstrate that an exclusion applies37, 38.
- Common exclusions often include events like war, nuclear hazards, floods, earthquakes, and gradual deterioration35, 36.
- While comprehensive, it's crucial for policyholders to understand specific policy language and exclusions.
Interpreting All Risk Insurance
Understanding an All Risk Insurance policy revolves primarily around identifying what is not covered, rather than what is. This fundamental difference streamlines the interpretation of coverage. When a loss occurs, the policyholder first demonstrates that the loss happened while the policy was in effect. The burden of proof then shifts to the insurer to prove that the cause of the loss is specifically listed as an exclusion within the insurance policy33, 34. If the insurer cannot establish that an exclusion applies, the claim should be covered32. This framework typically favors the insured in a dispute, as it requires the insurer to explicitly define limitations.
Hypothetical Example
Consider Sarah, a small business owner who has an All Risk Insurance policy for her bakery. One evening, a sudden and unexpected pipe burst, causing significant water damage to her equipment and the interior of the shop.
When Sarah files a claim, she doesn't need to specify that "burst pipes" are covered. Instead, her insurer must review her All Risk Insurance policy to determine if "pipe bursts" or "water damage from internal plumbing" are explicitly listed as exclusions. Since such an event is typically not excluded unless due to neglect (e.g., intentional damage or a slow leak over time leading to mold), the policy is likely to cover the repairs to her equipment and the shop interior. This demonstrates how All Risk Insurance simplifies the claim process by covering unforeseen incidents.
Practical Applications
All Risk Insurance is widely applied across various sectors, particularly in property insurance for both individuals and businesses. It forms the basis of many homeowners insurance policies (such as an HO-5 policy in the U.S.) and is a common choice for commercial property insurance30, 31. Businesses often opt for All Risk Insurance to protect their physical assets, inventory, and equipment against a broad spectrum of perils, from fire and theft to less common events like falling objects or accidental damage28, 29.
In a broader financial context, the principle of identifying and managing risks through insurance is central to effective risk management strategies. Regulatory bodies, such as the National Association of Insurance Commissioners (NAIC)26, 27 and, in some cases, the Federal Reserve24, 25, monitor the insurance industry, including the types of policies offered and their capital requirements, to ensure financial stability and consumer protection. The Securities and Exchange Commission (SEC) also has specific disclosure requirements for publicly traded companies, which can influence how companies manage and disclose their insurance-related risks, especially in areas like cybersecurity22, 23.
Limitations and Criticisms
Despite its broad coverage, All Risk Insurance policies are not without limitations. The term "all risks" itself can be misleading, as no insurance policy truly covers all possible risks21. Policies contain specific exclusions that explicitly state what is not covered20. Common exclusions include damages from war, nuclear incidents, gradual deterioration (like wear and tear), infestations, pollution, and certain natural disasters such as floods and earthquakes, unless specific riders or separate policies are purchased15, 16, 17, 18, 19.
Another criticism stems from the complexity of interpreting these exclusions. While the burden of proof rests with the insurer to demonstrate an exclusion, disputes can still arise over the exact interpretation of policy terms and whether a particular loss falls under a general exclusion or is a covered peril14. Policyholders may assume coverage for an event that is, in fact, silently excluded, leading to denied claims and financial surprises13.
All Risk Insurance vs. Named Perils Insurance
The distinction between All Risk Insurance and Named Perils Insurance is fundamental to understanding property and casualty coverage.
| Feature | All Risk Insurance (Open Perils / Special Perils) | Named Perils Insurance |
|---|---|---|
| What it Covers | All risks of loss or damage, except those specifically listed as exclusions. | Only risks (perils) that are explicitly listed or "named" in the policy12. |
| Burden of Proof | Insurer must prove the loss is due to an exclusion for a claim denial11. | Policyholder must prove the loss was caused by a named peril10. |
| Scope | Broader coverage, protects against unforeseen events9. | Narrower coverage, only listed events are covered8. |
| Cost | Typically more expensive due to broader coverage6, 7. | Generally less expensive5. |
Confusion often arises because individuals might mistakenly believe "all risk" implies absolute protection, leading to disappointment if a claim falls under an unread exclusion. Conversely, with Named Perils Insurance, a loss caused by an unlisted event, no matter how catastrophic, will not be covered, placing the onus on the insured to anticipate all potential hazards4.
FAQs
What is the primary benefit of an All Risk Insurance policy?
The main benefit of an All Risk Insurance policy is its broad coverage. It protects against a wide range of potential losses and damages, including those that might be unexpected or unusual, as long as they are not explicitly listed as exclusions in the insurance policy.
Are natural disasters always covered by All Risk Insurance?
No. While All Risk Insurance offers broad coverage, common natural disasters such as floods, earthquakes, and sometimes windstorms are often specifically listed as exclusions2, 3. Policyholders typically need to purchase separate policies or add specific riders to their existing policies for these types of catastrophic events.
How does the premium for All Risk Insurance compare to Named Perils Insurance?
All Risk Insurance policies generally have higher premiums than Named Perils Insurance policies1. This is because the broader coverage offered by All Risk Insurance means the insurer takes on a greater scope of potential risk. The specific premium amount will also depend on factors such as the value of the insured property, its location, and the specific deductible chosen.
What is "insurable interest" in the context of All Risk Insurance?
Insurable interest means that the policyholder must stand to suffer a financial loss if the insured property is damaged or destroyed. For an All Risk Insurance policy to be valid, the person taking out the policy must have a legitimate financial stake in the property being covered. This principle ensures that insurance is used for protection against genuine losses, not for speculative gain.