All Risks Covered: what's in a (blog) name?

All Risks Covered is Womble Carlyle’s new blog devoted to business insurance issues in North Carolina. This includes commercial property insurance, commercial general liability insurance, employment practices liability, insurer bad faith, directors & officers insurance, agents and brokers issues, errors & omissions insurance, cyber insurance, captive insurance, and insurance regulatory matters.


The blog’s name, All Risks Covered, will sound family to anyone who has ever bought an “all risk” insurance policy. “All risk” was, for a long period of time, considered the desirable property insurance policy for homeowners and many small and middle-market businesses. But understanding “all risk” coverage means understanding some of the basics of property insurance.


An insurance policy is a written contract between two parties; the insurance company and the policyholder. A property policy obligates the insurance company to pay for certain losses if they fall within the scope of the policy, subject to certain exclusions and conditions. Because all commercial policies have some exclusions, even policies named “all risk” do not actually cover all possible risks. These policies are still subject to certain exclusions.


The use of “all risk” differentiates certain property policies from policies that only cover specific named risks. As a result, policies are either “named peril” or “all risk” (which is now often called “comprehensive” or “open peril” to avoid confusion and to account for the exclusions).


A named peril policy only provides coverage for risks which are specifically named in the policy. The quintessential example would be a 19th century fire insurance policy; that was a property insurance policy that insured a property owner against loss by “fire” but nothing else. Today, popular commercial property insurance named perils policies typically provide coverage for physical losses as a result of:

• Fire
• Lightning
• Explosion
• Windstorm or Hail
• Smoke
• Riot or Civil Commotion
• Sinkhole Collapse
• Volcanic Action

As a result, if a loss is sustained by perils which are available as additional coverage, such as “weight of snow, ice, or sleet,” “water damage,” or “flood,” those would not be covered under the named peril policy. Any recovery must fall within one of the named perils. However, because the insurance policy only covers certain discrete categories of risk, it will be less expensive to purchase compared to an “all risk/open perils” policy.


An “all risk” or “open perils” policy works in the opposite way. It is designed to cover all types of physical loss, only excepting items that are specifically excluded in writing by the insurer. In other words, the named peril policy is a contract of inclusion (future losses are only covered if they are specifically included) while an all risk or open perils policy is a contract of exclusion (all future physical losses are covered unless they are specifically excluded).


Because the scope of coverage for an all risk policy is so much greater, these policies are more expensive than a named perils policy. The choice between the two policy types is often dictated as much by the policyholder’s financial condition as anything else. Lenders often have specific insurance requirements to protect the collateral which secures their loans. If a lender requires your business to have a comprehensive, open perils policy, that is simply a reflection of the lender’s desire to protect their investment against a broader array of risks and accidents which could occur.
 

As a legal matter, if there is a dispute as to insurance coverage under a property policy, the burden of proof at trial is different between an all risk policy compared to a named perils policy. Under a named perils policy, the burden of proof is on the policyholder to prove that the loss falls within one of the specifically named perils contained in the policy. In contrast, under an all risk policy, the burden of proof at trial rests on the insurance company to prove that one of the exclusions applies.
  

As I mentioned above, there has been a shift in the industry away from using the term “all risk” for these policies because they do not literally cover all risks which a policyholder may face. Indeed, the scope of coverage is really determined by the exclusions (and any exceptions to the exclusions). Most all risk/open peril policies continue to have numerous exclusions, including flooding (which can include or exclude sewage backup), ground shifting or earth movement (which can include or exclude earthquakes, mine subsidence, and mudslides), nuclear hazards, government action, war, and many others.