Choosing Disaster Insurance: Named Perils Policy vs. All-Risk Policy

When choosing disaster insurance, you basically have two choices — a named peril policy or an all-risk policy, also known as a comprehensive policy or an open peril policy. The primary difference between them is that one type of policy covers what is "named" (included) in the policy while the other covers what is not included.

A named peril policy is often a good choice for those business owners whose business is located in an area frequently hit by natural disasters such as hurricanes, tornados, or floods. Such a policy spells out the specific events for which you are covered. The cost of the premiums will depend on the location of the business and the likelihood of the specific peril(s). Anything not specifically named in such a policy is not covered.

An all-risk policy covers your business from damages caused by any type of disaster with the exception of those specifically excluded in the policy. Floods and earthquakes are two events that are typically excluded, but coverage for these types of disasters can be added to the policy for an additional fee. The National Flood Insurance program underwrites coverage for flooding, making it more easily available to business owners. (For another informative government Web site, visit Floodsmart.gov.)

For most businesses, an all-risk policy (with perhaps a rider to cover flooding) will suffice. However, only you can determine your needs based on your location and the property and equipment you need to protect. The advantage of an all-risk policy is that it covers you in the event of a disaster you did not predict happening, and many unusual disastrous events fall into this category. For example, one small business owner in a rural town was pleased that he chose an all-risk policy after a horse pulling a carriage got startled and backed up quickly, sending the carriage through his front window and into the middle of his shop. There was no exclusion for horse-drawn carriages coming through the window and therefore he was able to collect.

In today's world of numerous choices and comprehensive insurance options, you can typically purchase a small business package that meets your needs. You do, however, have to determine what you are insuring and for how much. Take stock of your business property, determine the value, and decide what is and is not worth insuring.

Among the possible items that you may want to consider covering will be:

• Buildings, garages, and all structures (some of which will be included together — read the policy closely)
• Equipment, machinery, and supplies
• Inventory (read Developing an Inventory List)
• Documents, business records, databases
• Vehicles including trucks, vans, and company cars

Cover as much as possible under the broader policy and then determine what you want covered under a more specific policy, such as a named peril or on a rider. When evaluating policies, read the content carefully so that you do not purchase a named peril policy for something that is already covered under your all-risk policy.

Keep in mind that you can increase or limit your coverage over time. Often, business owners simply let their insurance coverage carry over from year to year without adding coverage for new equipment or business-related items that have recently been purchased.

For more information on how to protect your business from natural disasters and other unfortunate events, be sure to read Protecting Your Business from Disaster and Emergency.

Remember: Earthquakes, hurricanes, floods, fires, and other types of disasters can strike without warning. Be sure to review our Disaster Kit Supply Checklist for a helpful list of recommended emergency supplies to have on hand in your office or workplace.