Exclusion Defined: What Insurance Policy Exclusions Really Mean
What Does “Exclusion” Mean in Insurance?
An insurance exclusion refers to losses, perils, property, or risks that are not covered under an insurance policy. Exclusions outline situations and events that could result in damage or liability for which the insurance company will not pay.
Common Types of Insurance Exclusions
Peril exclusions – These exclude coverage for damage caused by specific events like earthquakes, floods, wars, or nuclear accidents.
Property exclusions – These exclude certain types of property from coverage, like cars, jewelry, or land.
Coverage exclusions – These limit the scope of coverage offered. For example, a home insurance policy may cover fire damage but exclude coverage for detached structures.
Insurance companies list exclusions in the policy documents and contracts. It’s important for policyholders to understand exclusions to know what risks they retain and what damage or accidents would not result in an insurance claim payout.
Why Do Insurance Policies Have Exclusions?
Insurance providers use exclusions to limit high-risk exposure. Offering unlimited, all-encompassing coverage would be financially unsustainable for insurance companies. By excluding selected perils, properties, or situations, they can offer more affordable plans. Exclusions also discourage fraudulent claims by removing coverage for damage policyholders themselves could easily cause, like bursts pipes on uninsured secondary properties. They encourage policyholders to take precautions against risks like floods and earthquakes that individuals have some capacity to mitigate.
Reviewing Your Policy’s Exclusions Language
The exact exclusions defined in an insurance contract vary by state regulations, insurance company, and type of policy. For instance, a California home insurance provider will likely exclude earthquake damage given the high risk.
When reviewing your own home, auto, business, or other insurance policy, pay special attention to the exclusions section. This will use legal but fairly clear exclusionary language to outline restrictions. Make sure you understand each exclusion and especially how they interact with optional add-on coverage.
For example, your homeowners insurance may exclude flood damage but allow you to add separate flood insurance. Or your business policy may exclude cyber risks but offer add-on riders to meet your coverage exclusions.
Working with an experienced insurance agent can help clarify how exclusions work. Don’t hesitate to ask questions if the legal terminology is confusing at first glance.
Managing Risks Associated with Exclusions
While insurance exclusions can help providers offer more affordable coverage, they do leave policyholders responsible for a wide range of risks. From floods and earthquakes to wear and tear and vermin, the list of potentially costly exclusions is long.
That’s why it’s essential to audit your risks and arrange contingency savings for repairs. Basic maintenance, risk mitigation steps for your home and business, and an emergency fund can help fill the most common excluded perils.
For very high risks like floods, earthquakes, and cyber attacks, additional specialty insurance can provide protection. Just make sure to understand any exclusions layered on top of exclusions across multiple linked policies.