What Is Open Perils?
Open perils is a type of insurance policy that provides broad coverage for property against any peril or cause of loss, unless that specific cause is explicitly listed as an exclusion within the policy document. This type of policy is a fundamental concept within property insurance and casualty insurance, shifting the burden of proof to the insurer to demonstrate that a claimed loss falls under an exclusion.
History and Origin
The concept of "all risks" coverage, which is now commonly referred to as open perils, developed significantly in the mid-20th century, particularly in the United States. Historically, insurance policies were often structured around a list of specific, named perils, meaning coverage was only provided for losses caused by the events explicitly stated in the policy. As economies grew and risks became more complex, there was a demand for broader protection. The evolution towards "all risks" or open perils policies offered a more comprehensive approach, seeking to eliminate potential gaps in coverage that could arise from individually listing covered risks. Early forms of comprehensive coverage can be traced back to marine insurance as far back as the 14th century, which often covered "all risks" of the sea18. The shift to this broader approach in property insurance aimed to simplify policies and provide more complete protection, moving beyond the traditional separation of fire, marine, and casualty branches of insurance17.
Key Takeaways
- Open perils policies cover all causes of loss except those specifically excluded in the policy language.
- The burden of proof typically lies with the insurer to demonstrate that an exclusion applies to a loss.
- This type of policy offers more extensive coverage than a named perils policy, which only covers risks explicitly listed.
- Common exclusions in open perils policies include events like floods, earthquakes, war, and nuclear hazards.
- The term "open perils" is increasingly favored over "all risks" to manage policyholder expectations, as no policy truly covers "all" possible risks.
Interpreting the Open Perils
Interpreting an open perils policy primarily involves a thorough understanding of its exclusions. Since the policy covers everything not explicitly excluded, any loss not found on the exclusion list is generally covered, provided the loss is direct physical damage and fortuitous. When a claim is filed, the insured only needs to prove that a direct physical loss occurred. The onus then shifts to the insurer's underwriting department to demonstrate that the cause of loss is specifically excluded by the policy terms. This structure generally provides policyholders with a higher level of confidence, as unexpected or unusual perils may still be covered even if they are not explicitly mentioned in the policy's covered events.
Hypothetical Example
Consider Jane, a homeowner with an open perils homeowners insurance policy. One day, a rare, large meteorite falls from the sky and damages her roof and a portion of her living room. When Jane files a claim, her insurer reviews the policy. Since "meteorite impact" is not listed as an exclusion in her open perils policy, the damage is covered, even though it's an uncommon event not explicitly listed as a covered peril. Jane's policy has a $1,000 deductible, meaning she pays the first $1,000 of the repair costs, and the insurer covers the remaining amount up to the policy limits. If her policy was a named perils policy and "meteorite impact" was not specifically listed, her claim would likely be denied.
Practical Applications
Open perils policies are widely used in various forms of property insurance, particularly for commercial and residential properties, including homeowners insurance. For example, standard homeowners insurance forms, such as the HO-3 (Special Form) and HO-5 (Comprehensive Form) in the U.S., provide open perils coverage for the dwelling and other structures14, 15, 16. These forms are often developed and standardized by organizations like the Insurance Services Office (ISO), which creates policy language and provides actuarial services to insurers12, 13.
In the realm of risk management for businesses, open perils commercial property policies ensure broad protection against a wide array of potential damages to buildings and business personal property. This comprehensive approach is vital for companies seeking to mitigate unforeseen financial impacts from property losses. The standardization of policy forms by organizations such as ISO assists insurers in developing products that adhere to regulatory requirements and serve a variety of market segments, from commercial casualty insurance to personal lines11. The National Association of Insurance Commissioners (NAIC) also plays a role in overseeing state insurance regulation, which influences the development and approval of these policy forms9, 10.
Limitations and Criticisms
While open perils policies offer extensive coverage, they are not without limitations. The primary limitation stems from the specific exclusions detailed within the policy. Common exclusions often include damages from events like war, nuclear hazards, earth movement (e.g., earthquakes, landslides), and flood. Policyholders must carefully review these exclusions, as they define the boundaries of the otherwise broad coverage.
Another criticism arises from the perceived implication of "all" in "all risks" policies, which can lead policyholders to believe they are covered for every conceivable event. This misperception has led the insurance industry to increasingly use the term "open perils" or "special perils" instead, to more accurately reflect that the coverage is broad but subject to defined limitations7, 8. Furthermore, court or regulatory actions could potentially nullify or modify policy exclusions, which could significantly impact an insurer's financial exposure6. Policyholders should be aware that even an open perils policy typically does not cover losses resulting from neglect, intentional acts, or normal wear and tear.
Open Perils vs. Named Perils
The fundamental difference between open perils and named perils policies lies in how covered events are defined. A named perils policy specifically lists the events or causes of loss that are covered. If a loss occurs due to an event not on that list, there is no coverage. For example, a basic fire insurance policy is a named perils policy, covering only losses from fire and sometimes lightning4, 5. The burden of proof in a named perils policy rests with the insured, who must demonstrate that the damage was caused by one of the listed perils.
In contrast, an open perils policy covers all causes of loss unless explicitly excluded. The policyholder does not need to prove the specific cause of loss, only that a loss occurred. The burden then shifts to the insurer to prove that an exclusion applies. While open perils policies generally offer broader protection, they are typically more expensive due to the wider range of covered risks. Homeowners insurance policies often combine these approaches, with an HO-3 policy, for instance, providing open perils coverage for the dwelling and named perils coverage for personal property1, 2, 3.
FAQs
What does "peril" mean in insurance?
In insurance, a peril is a cause of loss. Examples include fire, theft, windstorm, or vandalism. An insurance policy is designed to protect against financial losses that result from specific perils.
Is an open perils policy more expensive?
Generally, yes. Because an open perils policy provides broader coverage by covering any loss not specifically excluded, it assumes a greater risk for the insurer compared to a named perils policy. Consequently, the premium for an open perils policy is typically higher.
What are some common exclusions in an open perils policy?
Common exclusions in open perils policies often include damages from floods, earthquakes, landslides, mudslides, nuclear hazards, war, intentional acts by the insured, and often losses related to certain types of water damage (like sewer backup or sump pump overflow) unless specifically endorsed for additional coverage.
Can I add coverage for excluded perils?
In many cases, yes. While certain perils like floods or earthquakes are standard exclusions in open perils policies, you can often purchase separate policies or endorsements (riders) to obtain liability or property coverage for these specific risks. This allows policyholders to tailor their protection to their individual needs.