The Purpose of Insurance Exclusions
An exclusion is a policy provision that eliminates coverage for some type of risk. Exclusions narrow the scope of coverage provided by the insuring agreement. In many insurance policies, the insuring agreement is very broad. Insurers utilize exclusions to carve away coverage for risks they are unwilling to insure.
Reasons to Exclude Risks
Exclusions serve various purposes. Most apply to risks that fall into one of the following categories.
- Catastrophic: Some risks are uninsurable because they are likely to affect a huge number of policyholders at once. An example is war.
- Covered Elsewhere: Many risks are excluded under one type of policy because they are covered under another. For instance, auto liability claims are excluded under a general liability policy because they are covered by a commercial auto policy.
- Easy To Control: Some risks are excluded because they are easily controlled by the policyholder. An example is damage to personal property in the open caused by rain, snow, ice or sleet. Such damage is excluded under most commercial property policies because it is easily prevented by the insured.
- Not Accidental: Most insurance policies cover fortuitous events. Thus, they exclude losses the insured caused intentionally. For example, both general liability and commercial auto liability policies exclude bodily injury that an insured inflicts on a third party intentionally.
- Maintenance Issues: Some risks are not practical to insure because they occur naturally. An example is wear and tear. Damage caused by wear and tear is excluded from both commercial property and auto physical damage coverage. Risks of this type can often be controlled through proper maintenance. Vehicle tires can be protected from wear and tear through proper rotation.
- Illegal: Many policies exclude losses that result from violations of the law or criminal acts. For example, general liability policies exclude bodily injury, property damage or personal and advertising injury that results from a violation of the Telephone Consumer Protection Act or CAN-SPAM Act.
- Partially Insurable: Some risks are insurable within specific parameters. For instance, many liability policies exclude liability assumed under a contract. However, coverage is provided for liability assumed under a contract that qualifies as an insured contract (as defined in the policy).
- Insurable for a Price: Some risks are insurable if you are willing to pay an additional premium. An example is a loss caused by theft committed by your employees. Such losses are routinely excluded under commercial property policies. However, you can insure such losses by purchasing employee theft coverage.
Policy forms are not cast in stone. Most are revised periodically. ISO updates it's commercial auto, general liability and commercial property forms every few years. Insurers often follow, incorporating the changes ISO has made into their proprietary forms. A common outcome of the form revision process is the addition or modification of policy exclusions.
Many of the changes made to policy exclusions are a response to recent court decisions. ISO and insurers draft policy forms with the intention of limiting coverage to certain risks. A court may determine that the policy covers a risk that the drafter assumed was excluded. ISO or the insurer may then add or modify an exclusion to remove coverage for that risk.
An obvious place to look for policy exclusions is in the section entitled exclusions. Some policies contain both exclusions and limitations. A limitation is a partial exclusion. It narrows the scope of coverage for an insured risk. For instance, property policies often restrict coverage for valuable items like furs and jewelry to a specified (low) limit.
A policy that provides more than one type of coverage may contain multiple lists of exclusions. A separate list applies to each type of coverage. For example, a typical commercial auto policy contains two sets of exclusions, one under Liability Coverage and the other under Physical Damage Coverage.
Some policies that provide multiple coverages include only one set of exclusions. Each exclusion applies to all coverages. Other policies contain separate exclusions for each type of coverage and common exclusions that apply to all coverages.
A policy may contain exclusions that are not located in the exclusions section. Here are some places where they often appear.
One of the most common places to find policy exclusions is the definitions section. Definitions attach specific meanings to words so that they can narrow the scope of coverage. For example, many policies define a coverage territory, which limits coverage to events that take place in specified countries. This definition serves as an exclusion since events that occur outside the specified countries are not covered. Policies that do not specify a coverage territory generally cover events that occur anywhere in the world.
Exclusions can also be found in the policy section. For example, the ISO commercial auto policy contains a provision that limits coverage to accidents that occur in the coverage territory. This provision appears in the general conditions section, not the definitions.
Many insurers add exclusions to policies by attaching endorsements to preprinted forms. An endorsement may add a new exclusion or modify an existing one.
The insuring agreement is the backbone of a policy. It typically contains broad statements describing the coverage provided. Even the insuring agreement can contain exclusions. For instance, the insuring agreement in the standard general liability policy specifically excludes bodily injury or property damage that was known to certain insured parties before the policy began.