William S. Bennett | SDV Insights
First-party insurance coverage is typically structured on the basis of one of two types of insuring agreements: “All Risks” and “Covered Peril.” While the difference may seem innocuous, the ramifications of having one versus the other can be monumentally important in a disputed claim scenario. For the reasons discussed in this article, we recommend that, in almost every situation, the insured should aim to secure an “all risks” policy form.
What is the difference?
In an “all risks” policy form, the insuring agreement of the policy’s main coverage will typically state something to the effect of, “this policy insures all risks of direct physical loss or damage, except as excluded herein.” In other words, the insurance company is assuming “all risks” of physical loss and is not outright limiting the coverage to specific causes of loss.
In a “covered peril” policy form (sometimes called a “covered causes of loss” form), the insuring agreement will typically state, in effect, that it covers those covered perils identified in the form. In this situation, the policy’s coverage is conditional on the cause of loss falling within those defined perils. Note that, although not especially common, some policy forms will say that they cover those covered perils identified in the form but then defined “covered perils” or “covered causes of loss” as “all risks of direct physical loss or damage except as otherwise excluded.” This effectively converts the policy form back to an “all risks” policy form.
Why does the distinction matter?
The answer is a product of common law approaches by courts to policy interpretation and application in insurance coverage disputes. In nearly every jurisdiction in the country, burdens of proof in insurance disputes are clearly defined. Generally, the insured has the first burden in the dispute and must establish that the loss giving rise to the insurance claim triggers the policy’s insuring agreement. In a first-party insurance dispute, this means the insured will usually have the initial burden to establish that the loss was caused by either “all risks of direct physical loss or damage” or a “covered peril.” Which of these insuring agreements is in the policy greatly affects the standing of the insured in that coverage dispute.
If the policy has “all risks” language, the insured must merely show that the loss is a direct physical loss. If, on the other hand, the policy has “covered peril” language, the insured must now show that the loss is, in fact, caused by a specific peril – i.e., a named storm, wind-driven rain, or flood. In a situation where the facts of the loss involve multiple contributing causes or other issues of causation, especially, the insured can face a significant amount of legwork in that case to meet its initial burden of proof, creating an unnecessary disadvantage. Further, where the loss comes from an unusual cause, the insured almost certainly will not be able to trigger the insuring agreement, because the list of covered perils probably will not account for it.
Equally as important as the shifted burden to the insured with the “covered perils” language is the shifted burden away from the insurer. In insurance law, once the insured has established that the policy’s insuring agreement is triggered, the burden shifts to the insurer to demonstrate that an exclusion applies to prevent coverage. In an “all risks” situation, it may very well be that the policy is written to account for covering most of the same perils. However, by writing the limitations into the policy as an exclusion, rather than as an unlisted peril, the burden to demonstrate that the claim is not covered has been shifted to the insurer. Where the claim involves complicated causation issues, this distinction can be the difference between the insured securing coverage and the insurer avoiding it, especially taking into consideration other common law factors like the efficient proximate cause doctrine and rules regarding concurrent causation issues.
Since “all risks” policies are more comprehensive than named peril policies, include broader coverage, and are generally more favorable to the insured in a disputed claim scenario, they are also often more expensive in the market. Based on these considerations, insureds should carefully consider the type of policy they are considering purchasing. If it is a covered peril policy, any loss which is not caused by a peril expressly named in the policy would be excluded. However, if the insurance coverage is under an “all risks” policy, an insurer would need to demonstrate that the peril which led to the damage was specifically excluded under a policy limitation or exclusion.
When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.