All Risks Clause – Definition

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All Risks Clause or All-Risks Coverage Definition

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.

A Little More on What are All Risks Clauses in Insurance Contracts

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.

References for All Risk Clauses

Academic Research

The design of an optimal insurance policy, Raviv, A. (1979). The American Economic Review, 69(1), 84-96. All risks rating within a catastrophe insurance system, Anderson, D. R. (1976). All risks rating within a catastrophe insurance system. Journal of Risk and Insurance, 629-651. Private and public programs for compensating individuals for property damage from catastrophes recently have increased significantly. The plethora of programs creates many problems. The author argues for a comprehensive catastrophe insurance system with an all risks policy and all risks rating. Necessary conditions for all risks rating are established. Benefits from an all risks system are examined. Guidelines for all risks rates are developed. A catastrophe insurance system, based on an all risks policy, returns to basic insurance principles. It employs a cooperative mix of industry and government, using the best of both.

On the dependency of risks in the individual life model, Dhaene, J., & Goovaerts, M. J. (1997). Insurance: Mathematics and Economics, 19(3), 243-253. The paper considers several types of dependencies between the different risks of a life insurance portfolio. Each policy is assumed to have a positive face amount (or an amount at risk) during a certain reference period. The amount is due if the policy holder dies during the reference period. First, we will look for the type of dependency between individuals that gives rise to the riskiest aggregate claims in the sense that it leads to the largest stop-loss premiums. Further, this result is used to derive results for weaker forms of dependency, where the only non-independent risks of the portfolio are the risks of couples.

Optimal insurance in incomplete markets, Doherty, N. A., & Schlesinger, H. (1983). Optimal insurance in incomplete markets. journal of political economy, 91(6), 1045-1054. This paper examines the theory of optimal insurance purchasing in the presence of uninsurable background risk. Existing theorems concerning the optimal level of insurance and the optimal form of an insurance contract are shown to hold only under restricted market and risk assumptions. In particular, conditions sufficient for the optimality of full coverage or sufficient for the optimality of deductible policies depend on the correlation between insurable and uninsurable risks. These results may provide a partial explanation why existing theory is often contradicted by observable behavior.

A contract clause for allocating risks, Jergeas, G. F., & Hartman, F. T. (1996). A contract clause for allocating risks. AACE International Transactions, DRM11.

Small to medium contractor contingency and assumption of risk, Smith, G. R., & Bohn, C. M. (1999). Journal of construction engineering and management, 125(2), 101-108. This paper is the result of an investigation into the use of contingency in smaller construction firms. It summarizes recent literature classifying construction contract risks and mitigation measures. Eight major classifications are used to organize the types of risk found in the literature. The risks are described in detail with associated risk mitigation strategies. Risk modeling techniques are briefly reviewed for their contribution to the risk categorization and contingency estimating. After reviewing the researcher’s concepts of risk management in the literature, interviews were conducted with estimators and/or construction managers involved in the bidding process at 12 small to medium construction firms. The purpose of the interviews was to investigate the current risk management practices of small and medium size construction firms. The times when smaller companies used contingency had specific interest for the research. The literature findings were compared with important risk factors identified from the interviews. The main conclusion drawn from the comparison was that small to medium size contractors predominately use contingency in those situations where they are construction managers in a reimbursable contract. Generally, they do not use line item contingency in competitive bidding situations. Thus, these firms are assuming proportionally greater business risk than suggested by the literature on contingency.

Risk management framework for construction projects in developing countries, Wang, S. Q., Dulaimi, M. F., & Aguria, M. Y. (2004). Risk management framework for construction projects in developing countries. Construction Management and Economics, 22(3), 237-252. It is important to manage the multifaceted risks associated with international construction projects, in particular in developing countries, not only to secure work but also to make profit. This research seeks to identify and evaluate these risks and their effective mitigation measures and to develop a risk management framework which the international investors/developers/contractors can adopt when contracting construction work in developing countries. A survey was conducted and twenty‐eight critical risks were identified, categorized into three (country, market and project) hierarchical levels and their criticality evaluated and ranked. For each of the identified risks, practical mitigation measures have also been proposed and evaluated. Almost all mitigation measures have been perceived by the survey respondents as effective. A risk model, named Alien Eyes’ Risk Model, which shows the hierarchical levels of the risks and the influence relationship among the risks, is also proposed. Based on the findings, a qualitative risk mitigation framework was finally proposed which will benefit the risk management of construction project in developing countries.

Construction contracts: the cost of mistrust, Zaghloul, R., & Hartman, F. (2003). Construction contracts: the cost of mistrust. International Journal of Project Management, 21(6), 419-424. Current contractual relationships are mainly based on confrontational situations that reflect the level of trust (or mistrust) in the contract documents. This can be the driver to increase the total cost of a specific project and affect the overall relationship between the contracting parties. This has been tested in the construction industry in Canada, and appears to be generalizable across North America. Based on two independent surveys (including the one presented in this paper) of Owners, Consultants and Contractors across Canada, the assessed premium associated with the five most commonly used exculpatory clauses in construction is between 8 and 20% in a seller’s market. It should be obvious that trust and contracting methods are related and that this relationship is of vital importance to effective project management and contract administration. To date, little work has been done to explore the advantages of this relationship. This paper presents some of the results of a survey conducted across the Canadian construction industry that identifies some opportunities for better risk allocation mechanism and contracting strategies that are based on a trust relationship between the contracting parties. These opportunities are based on a trust relationship that can be the root cause for a significant saving in the annual bill for construction.

The controlling influences on effective risk identification and assessment for construction design management, Chapman, R. J. (2001). International Journal of Project Management, 19(3), 147-160. Project risk management (PRM) can provide a decisive competitive advantage to building sponsors. For those sponsors who take risks consciously, anticipate adverse changes, protect themselves from unexpected events and gain expertise to price risk, gain a leading edge. However, the realisation of this commercial advantage on design-intensive multi-disciplinary capital projects hinges to a large extent on the approach to the initial identification of risk. The very way the identification process is conducted will have a direct influence on the contribution that risk analysis and management makes to the overall project management of construction projects. This paper examines the steps involved in conducting the identification and assessment process and how they may influence the effectiveness of risk analysis. A series of issues are examined in turn, which are considered to have a direct bearing on the quality of the identification and assessment process. By focusing on these issues, our understanding of the contribution that risk management makes to improving project performance may be enhanced.

On the allocation of risk in construction projects, Ward, S. C., Chapman, C. B., & Curtis, B. (1991). International Journal of Project Management, 9(3), 140-147. The willingness of contracting parties to take on risks is an important consideration in the allocation of project risks. A number of factors contribute to willingness to bear risks, but not all motivate conscientious, effective project risk management. A party’s willingness to take on risk is reflected in the premium that he or she is able to charge for doing so. However, contractors face a number of difficulties in being able to price risk properly. The regarding of contractors as quasiinsurers suggests pricing rules that are analogous to insurance practice, and important complications associated with adverse selection and moral hazard.

Transparency and the disclosure of risk information in the banking sector, M. Linsley, P., & J. Shrives, P. (2005). Journal of Financial regulation and Compliance, 13(3), 205-214.

Risks, contracts, and private-sector participation in infrastructure, Marques, R. C., & Berg, S. (2011). Journal of Construction Engineering and Management, 137(11), 925-932. This article examines how risk is reflected in infrastructure regulatory contracts, using examples from water utilities to illustrate key points. Partnerships between public and private sectors in intensive capital network services require risks to be assigned to the contractual party that is better able to mitigate them or to bear them. After identifying risks that must be addressed in infrastructure contracts, their classification, allocation, and impact are presented along with the measures to minimize risks. Two contracts in the water sector in Portugal are analyzed. One arrangement corresponds to a public–private partnership (PPP) of the purely contractual type (concession arrangement) and the other to an institutionalized PPP (mixed company). We conclude that risk is a key issue in contracts with the private sector; an appropriate allocation of risks is a necessary condition for successful contracts.

Interpreting risk allocation mechanism in public–private partnership projects: an empirical study in a transaction cost economics perspective, Jin, X. H., & Doloi, H. (2008). Interpreting risk allocation mechanism in public–private partnership projects: an empirical study in a transaction cost economics perspective. Construction Management and Economics, 26(7), 707-721. Risk allocation in public–private partnership (PPP) projects is currently claimed as capability driven. While lacking theoretical support, the claim is often ‘violated’ by current industrial practice. There is thus a need for formal mechanisms to interpret why a particular risk is retained by government in one project while transferred to private partners in another. From the viewpoint of transaction cost economics (TCE), integrated with the resource‐based view (RBV) of organizational capabilities, this paper proposed a theoretical framework for understanding risk allocation practice in PPP projects. The theories underlying the major constructs and their links were articulated. Data gathered from an industry‐wide survey were used to test the framework. The results of multiple linear regression (MLR) generally support the proposed framework. It has been found that partners’ risk management routine, mechanism, commitment, cooperation history, and uncertainties associated with project risk management could serve to determine the risk allocation strategies adopted in a PPP project. This theoretical framework thus provides both government and private agencies with a logical and complete understanding of the process of selecting the allocation strategy for a particular risk in PPP projects. Moreover, it could be utilized to steer the risk allocation strategy by controlling certain critical determinants identified in the study. Study limitations and future research directions have also been set out.

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