What is the purpose of Exclusions in Insurance Policy?

In essence, insurance coverage is all about risk management. It's one of the most common ways for an individual or small business to protect themselves against financial loss, but insurance companies are also businesses with interests to protect.

This is why, in most cases, a standard insurance policy will include several exclusions. An exclusion is an occurrence (accident, incident, or accusation) that the insurer does not cover.

Want to learn more about common insurance exclusions?

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Insurance exclusions are clauses in policies that waive coverage for specific types of risks or "events." They are an important way for an insurer to limit the scope of coverage (via an exclusion clause) for risks that it is unwilling to cover.

As a result, a policy is defined largely by its various exclusions.

But why is that?

Finally, it's critical to remember that an insurer is a business. Many insurers would be discouraged from entering or remaining in the market if they had to cover excluded events.

While the majority of exclusions are found after the main coverage sections of your policy (named perils, personal property, personal liability, additional coverage, and medical payments to others), exclusions can also be found in the definitions, conditions, and endorsements sections.

The majority of the exclusions in your standard insurance policy will appear in named perils (aka, bad things that could happen to your stuff).

There are nine major exclusions to named perils:

1. Ordinance or Law

2. Earthquake 

3. The element water (think Flooding)

4. Power Outage

5. Neglect

6. War

7. Intentional Nuclear 

8. Hazard Loss

9. Governmental Intervention

The exclusions in a policy vary depending on several factors and are at the discretion of the provider.

Some exclusions in commercial property, homeowners, personal auto, and general liability insurance policies will be the same, but others will be specific to that type of policy. However, there are exclusion categories that can be broadly applied across all types of insurance.

They are as follows:

Some risks are simply unrecoverable because they are so taxing and can negatively affect a large number of policyholders at the same time.

The goal of insurance is to protect a person or business from mishaps and circumstances far above their control. As a result, if an insured causes the damage on purpose, most policies will not cover the losses.

There are plenty of risks that are exempted from one type of policy because they have been covered by another. A general liability policy, for example, will not cover vehicle liability claims because commercial auto policies do.

Most insurance policies contain exclusions that render the insurance contract null and void if the insured attempts to recoup losses caused by illegal or criminal behaviour. One of the first steps in evaluating a claim (under any insurance policy) is determining if the act that prompted the loss can be fairly counted as an "occurrence" under the policy. In most cases, a claim will not be counted as an occurrence if there is an underlying crime.

Simply put, not every risk can be insured, particularly because many of them happen gradually over time.

Some risks are excluded by insurers because they can be easily mitigated or significantly reduced by the insured taking the necessary precautions or actions.

Exclusions can also be found in the endorsements, definitions, and conditions sections of your insurance policy.

A common endorsement exclusion involves dogs and liability, specifically excluding violent breeds or carnivores with a history of biting. Exclusions on definitions and conditions help to narrow the scope of what your insurance company is attempting to establish in your policy. The moral of the story is that you should read your insurance policy... and then read it again!