I have previously blogged about the pros and cons of purchasing earthquake insurance. This week, I write to discuss an associated topic – the differences between an all-risk and a named peril insurance policy, and which is better in a given situation.
Essentially, insurers write two kinds of policies for homeowners and small businesses: named peril and all-risk (also known as a comprehensive policy or an open peril policy by some insurers).
Here’s how they differ:
A named peril insurance policy covers only what is specifically noted in the policy. For example, if it doesn’t say you’re covered for vandalism damages or backed up sewers, you aren’t. Since the named peril insurance policy only covers specific perils, it is usually less expensive than an all-risk or open peril insurance policy. A typical broad form named peril policy would cover fire, windstorm, hail, aircraft, riot, vandalism, explosion and smoke. Flood insurance and earthquake insurance are two other common examples of named peril policies. When coverage is written on a named peril basis, the burden is on the insured to prove that one of the named perils caused the loss.
An all-risk or open peril policy covers everything except what is specifically excluded in the policy. The all-risk insurance policy is usually more expensive than the named peril policy because it is more comprehensive. Under an all-risk policy, the burden is on the insurance company to prove that the peril causing the damage is not excluded; otherwise, coverage applies. Since the exclusions and limitations are the key to determining what coverage is provided by an all-risk policy, a better name might be “named exclusions” coverage. The most common perils excluded in an all-risk policy include:
- Earthquake or earth movement
- Flood, mudslide, seepage and sewer backup (and sometimes surface water that builds up after heavy rains, underwater springs, groundwater, burst water pipes, overflowing toilets, and wind or wave-driven water)
- Governmental seizure or destruction of property
- Boiler explosion
- Off-premises utility service interruption
- Building ordinance or law
- Seepage or leakage of water over a period of time
- Electrical damage to electrical devices
- Employee dishonesty
- Wear and tear; rust, corrosion, fungus, decay, deterioration, hidden or latent defect smog; settling, cracking, shrinking, or expansion; nesting, infestation or release of secretions by insects, birds, rodents or animals
- Damage to building interiors by rain, snow, sleet, ice, sand, or dust unless the roof or walls are first damaged – except damage by thawing of snow, ice or sleet
- Mechanical breakdown
- Theft of building materials and supplies not yet attached to buildings
So which insurance is the better choice? If you’re paying a mortgage, it is unlikely that you will have a choice. Most lenders require that you carry a comprehensive policy to protect its investment. For all others, the type of insurance to purchase should be need-based depending on your location and the type of property to be protected. The advantage of an all-risk policy is that it covers you in the event of a loss you did not predict. Even though an all-risk policy will cost more, in a world where freak accidents happen, the broader your insurance coverage, the better off you’ll probably be. Just be sure to read the fine print so that you’re clear about the stated exclusions.