Exclusion

What is an exclusion in insurance?

In insurance, an exclusion is something that is not covered under an insurance policy.

Exclusions come in many forms. For example:

• Excluded perils. A peril is the cause of a loss, like fire, water, hail, or theft. For example, many (but not all!) home insurance policies exclude earthquakes.
• Excluded property. Sometimes coverage applies to some types of property but not others. For example, a home insurance policy may cover the contents of the home, but not jewellery. Also, most home insurance policies exclude property that is better insured elsewhere, like vehicles and aircraft.
• Excluded actions. Even if a loss would normally be covered, it may be excluded if it was due to an intentional or fraudulent act. For example, a homeowner setting their house on fire to collect an insurance payout would receive no coverage, because of the intentional acts exclusion.

Depending on the type of insurance policy, you might find a long list of exclusions or just a few. A named perils policy covers all the perils it lists specifically. It excludes all other perils, even if they aren’t listed as such.

On the other hand, a comprehensive policy covers everything except what it lists as excluded. You’ll be sure to find every exclusion listed clearly on such a policy.

When an insurance policy excludes something, it means you have no coverage for that something. If you make a claim for it, the claim will be denied.

Why do insurance policies have exclusions?

Insurance policies can’t cover everything. The system would fall apart pretty fast if insurance companies had to pay for every claim, no matter what. At the very least, premiums would be far higher than anyone could possibly afford.

Instead, insurance companies carefully design their coverage to balance the scope of their coverage with the risk, and the cost they will have to charge for it.

They do this through the careful use of exclusions. There are many examples of why an insurer might choose to exclude something from a policy. For example:

• The risk is too high. Some things are excluded because the risk of loss is simply too great. Homes located on a known floodplain often have flood coverage excluded from their home insurance policies, because it would be impossible to provide this coverage at an affordable premium.
• The loss is covered elsewhere. Nuclear activity is excluded from home insurance, for example. There are government programs meant to cover damage from nuclear accidents, so insurers exclude it. Similarly, home insurance policies exclude motor vehicles because auto insurance policies cover them instead.
• They can’t price the risk. A major part of insurance is predicting the cost of future claims and setting premiums appropriately. Policies exclude war, because there’s simply no way to estimate the potential losses from a war or any predictable timeframe in which one would happen.
• The loss was avoidable. Home insurance providers encourage customers to take reasonable care of their property, and to take reasonable steps to prevent losses. For example, many policies exclude damage from frozen, burst pipes if the homeowner failed to take steps to keep the pipes warm. Wear + tear is excluded because homeowners are responsible for regular maintenance of their home.

While there are many reasons for exclusions, the ultimate goal is to keep premiums low for their customers. Offering coverage for too many high-risk or easily avoidable losses would be irresponsible. Exclusions are one of the main tools insurers have to ensure they’re using their customers’ premiums responsibly.

The important points

• Exclusions are things not covered by an insurance policy, like perils, types of property, or actions by the insured.
• Insurers use exclusions to manage their risk and keep premiums affordable.

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