What is All-Risks Coverage?

An All Risks Clause is a provision in an insurance policy that typically entertains (i.e. provides compensation for) all possible claims except the ones that have been specifically excluded in the insurance contract. An insurance policy that contains an all risk clause is known as an All-Risk or All-Peril Insurance. All-Risks Coverage is exclusive to property insurance and is occasionally included in Homeowners Insurance. All-Risk Insurance usually finds prevalence in the shipping and cargo market sectors, although several building contractors and developers also use this type of insurance to cover property under construction.

How do All Risks Clauses in Insurance Contracts Work?

Homeowners and businesses can generally pick from two types of property coverage - Named Risks (or Named Perils) and All Risks Coverage. As the name suggests, All-Risks coverage provides considerably more comprehensive protection compared to Named Risks coverage, which only covers risks that the insurance company has specifically included in the insurance contract. In simpler terms, an All-Risks Insurance automatically covers all unnamed risks, while a Named Risks Insurance covers only named risks. For example, let us consider an insurance policy with an All Risk clause that has specifically excluded damages from earthquakes in the policy contract. Such a policy will provide compensation for damages to property caused by flooding or hurricanes, or any other form of natural disasters, apart from earthquakes since these risks have not been specifically excluded. On the other hand, a Named Risks policy that has specifically included only the risks from earthquakes, will not provide reimbursement for damages caused by floods or hurricanes, or any other form of natural disasters, apart from earthquakes.

Exclusions in an All Risks Clause

From a practical point of view, the reimbursement under any condition component of All-Risk Insurance is often severely restricted by the presence of numerous exclusions that insurance companies inject into the contract. The following are some of the more common exclusions in a conventional All-Risk Insurance policy:

• Natural disasters, such as earthquakes, floods, volcanic eruptions, tornadoes, hurricanes and tsunamis.
• Acts of war, such as invasion/occupation, insurgency, revolution, military coup and terrorism.
• Asset forfeiture or destruction by the government.
• Normal or expected wear and tear.
• Hidden or latent defects.
• Pest infestation and rodent damage.
• Pollution.
• Specific types of water damage, including sewer backups.
• Breakage of fragile items.
• Nuclear hazard.
• Market loss.

Nevertheless, many insurance companies that include an All Risks clause in their insurance contracts often also provide the customer the option to add a rider to their policy. A rider is a type of insurance endorsement that allows the insured to include coverage for additional risks that have been specifically excluded from the original contract. Riders carry additional premiums, but do not significantly add to the overall cost of the policy. However, on their own, All-Risk Insurance policies are relatively much more expensive products compared to their counterparts.

Do You Really Need All-Risk Insurance?

Given the high costs associated with All-Risk Insurance, many homeowners and businesses are typically unable to afford such coverage. However, local laws often play an important role in deciding whether or not All-Risk Insurance is necessary. For example, places that are prone to earthquakes or floods are most likely to enforce earthquake and flood insurance respectively. Apart from specific legal requirements, All-Risk Insurance may also be mandated by the lender as coverage to protect the asset.

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