Exclusions are provisions in business insurance policies that eliminate coverage for certain types of property, perils, situations, or hazards. Risks described in exclusions aren't covered by the policy. Insurers utilize exclusions to remove coverage for hazards they're unwilling to insure.
Reasons to Exclude Risks
Insurance policy exclusions serve various purposes but most apply to risks that fall into one of the categories described below.
Some risks are uninsurable because they are catastrophic events. An example is war. If a war breaks out and a bomb damages your business property, your commercial property policy won't cover the loss. Virtually all property policies exclude damage caused by war and military action.
Some catastrophic events can be insured by specialized coverage. Examples are floods and earthquakes.
Covered by Another Policy
Many risks are excluded under one type of policy because they are covered by another. For instance, auto liability claims are excluded under a general liability policy because they are covered by a commercial auto policy. Similarly, liability and auto policies exclude any benefits the employer is obligated to pay under a workers' compensation law since such benefits are covered by workers' compensation insurance.
Some risks, such as wear and tear, are excluded because they are naturally occurring events that can be controlled by the policyholder through proper maintenance. Damage caused by wear and tear is excluded from both commercial property policies and auto physical damage insurance. Other risks that can be controlled through regular maintenance are rust, corrosion, and insect infestations.
Against Public Policy
Many insurance policies exclude crimes, violations of the law, and intentionally caused injuries because insuring them would be against public policy. For this reason, liability policies don't cover claims arising from the insured's intentional, harmful acts like firing a gun or committing fraud.
Exclusion Exceptions and Buybacks
Many exclusions contain exceptions that give back a limited amount of coverage. An example is the contractual liability exclusion in the standard general liability policy, which excludes liability assumed under a contract. An exception to the exclusion provides coverage for liability assumed under an insured contract (a defined term in the policy).
Some exclusions can be eliminated if you're willing to pay an additional premium. For instance, the standard general liability policy excludes claims arising out of injuries inflicted by one employee against another. Many businesses buy back coverage for co-employee claims by purchasing fellow employee coverage.
Watch for Changes
Policy forms aren't cast in stone. The Insurance Services Office (ISO) updates the standard commercial policy forms every few years. Insurers often follow suit, incorporating the changes the ISO has made into their proprietary forms. When the ISO or an insurer revises a form, it may add new exclusions or modify existing ones. A new exclusion generally means a reduction in coverage while an exclusion modification may broaden or restrict coverage.
Many states have laws requiring insurers to notify policyholders in advance if renewal policies contain exclusions or other restrictions not found in expiring policies.
Where to Look for Exclusions
An obvious place to look for policy exclusions is under the section titled "Exclusions." Many policies contain more than one list of exclusions. For instance, the standard business owners policy contains two sets of exclusions, one for property and another for liability. Some policies also contain a separate list of exclusions that apply to all coverages.
Many policies contain one or more sections entitled "limitations". A limitation is a partial exclusion and narrows the scope of coverage for a covered risk. For instance, theft is a covered peril under the standard business owners policy, but theft losses involving furs, jewelry, and other valuable items are subject to a $2,500 limit.
Exclusionary provisions can be found in other parts of the policy, not just the Exclusions section. One of the most common places for them to appear is in the policy "Definitions." Insurers define terms to attach specific meanings to them and narrow the scope of interpretation. For example, the standard business auto policy defines the word "auto" as a land motor vehicle, trailer, or semi-trailer designed for travel on public roads. The definition excludes mobile equipment, which is also a defined term that encompasses a broad array of machinery and equipment.
Another place where exclusions can be found is in the policy "Conditions" section. For instance, the standard business auto policy contains a provision that essentially excludes accidents that occur outside the defined "coverage territory." This provision appears in the general Conditions section, not the Definitions.
Finally, many insurers add exclusions to policies by attaching endorsements to preprinted forms. An endorsement may add a new exclusion or modify an existing one.