All Risk Policy – Is it safe to go beyond set boundaries?

All-risk policies are in demand and insureds seek covers across all their so called ‘risk’ needs. However, underwriters need to rein in their runaway experimentation, because courts expect that they have applied their mind when they gave covers as add-ons to all-risk covers.

It is not easy to understand the dimensions of an all-risk cover, because its limitations lie in the exclusions. In the case HCA, Inc. v. American Protection Insurance Co., 174 S.W.3d 184 (2005), Court of Appeals of Tennessee stated: “The effect of an all-risk policy is to broaden coverage. A policy of insurance insuring against all risks creates a special type of insurance "extending to risks not usually contemplated, and recovery under the policy will be generally allowed, at least for all losses of a fortuitous nature, in the absence of fraud or other intentional misconduct of the insured unless the policy contains a specific provision expressly excluding the loss from coverage….”

The often-cited cases relating to all-risk are British Foreign Marine Co. v. Gaunt, [1921] 2 A.C. [41] and Miller v. Boston Insurance Co., 420 Pa. 566, 218 A.2d 275 (1966). Supreme Court of India in the case Amrit Lal Sood & Anr vs Smt. Kaushalya Devi Thapar & Ors (1998) quoted Black's Law Dictionary which cited Miller v Boston.

Try not to go beyond the standard wording

The essence of all risk policy is that an insured can get near unlimited coverage and hence underwriters need to exercise restraint going beyond the standard accepted wording, because a court of law will not allow cancellation of such clauses or rectification of the policy. All-risk policies is expected to be limited to loss for “physical loss and damage”. There is a need to ensure that coverage excludes losses such as by “mysterious disappearance, loss or shortage disclosed on taking inventory, or any unexplained loss.” Corporate insureds may wish to foist losses on employees which might actually be the result of bookkeeping errors, waste or negligence. However, once the insured has established the existence of “physical loss or damage,” the burden of proof falls onto the insurers.

All risk policies can open up coverages

The effect of all risk cover can open up coverage in unexpected areas. In the case Dow Chemical Co. v. Royal Indem. Co., 635 F.2d 379 (1981), the United States Court of Appeals, Fifth Circuit, explained that the “primary purpose of purchase of an "all risks" policy by an insured would be to protect against fortuitous loss through fault of the subcontractors through whom the work was done; if subcontractor-fault were entirely excluded as a covered peril, the "all risks" peril expressly insured would become perilously close to a policy insuring no risk.”

All risk policies can be very wide as noted by the Court of Appeal of Alberta in the case Ledcor Construction Limited v Northbridge Indemnity Insurance Company, 2015: “It is admittedly not a “building warranty” agreement, which is intended to make sure that the building is constructed in a good and workmanlike way, using the proper materials.”

Paper Losses should not be allowed

Similarly, insureds may misuse the coverage and claim for ‘paper losses’. In the case Coven SpA v Hong Kong Chinese Insurance Co [1999] Lloyd's Rep IR 565 the Court of Appeal stated: … “they were not intended to provide cover against paper losses which it is conceived would not ordinarily be covered in a policy of this kind." However, the court also said that “It would be possible to insure against a measurement error that would require clear terms which were not in this policy. Put another way the policy only covered beans which existed and not beans which did not exist and in which the insured could have no insurable interest.”

Courts cautions underwriters in cases such as fraudulent Bills of Lading etc. In the case Chemical Bank v. Affiliated FM Ins. Co., 815 F. Supp. 115 (S.D.N.Y. 1993) the U.S. District Court for the Southern District of New York stated: “The practice is potentially very dangerous and one which is strongly deprecated by the Joint Cargo Committee. It could have the effect of committing Underwriters to financial losses unrelated to any maritime perils and where no cargo of any nature exists.” 

This quote was approvingly stated in the case Engelhart CTP (US) LLC v Lloyd's Syndicate 1221 & Ors [2018] EWHC 900 (Comm) by the England and Wales High Court. The court also stated in para 40 that “Since an All Risks marine cargo policy is generally construed as covering only losses flowing from physical loss or damage to goods, there must be clear words indicating a broader intention.” Attempts can be made by insureds to argue that shortage particularly in the context of "notwithstanding that seals may appear intact" covers paper losses. In Engelhart the court said: “My view is that "shortage" in the clause has its ordinary meaning and cannot cover a situation where there were no goods in the first place.”

Be careful about the needs of sophisticated customers

In the case ABN AMRO Bank NV v Royal & Sun Alliance Insurance Plc & Ors [2021] EWCA Civ 1789, the insured was a sophisticated Bank. At the time of claim the policy was a renewal policy. The marine all-risk cover was extended to provide cover which was in the nature of credit risk insurance. It was over and above the cover (in respect of physical loss of and damage to goods) traditionally provided by the marine cargo market. The policy was further tightened by a non-avoidance clause. During the case the insurers wanted to negate and raised arguments based on rectification, collateral contract, estoppel by convention. The court said that, applying the well-established principles of legal construction, the wording of the clause was clear, and therefore its natural meaning should not be rejected simply because it was an imprudent term for the underwriters to have agreed, given the adverse commercial consequences for them.