Insurance exclusions serve to protect an insurer from risk they are not interested in taking as well as to allow a person or organization to reduce their insurance costs by limiting their requested coverage. There are exclusions available, and sometimes necessary, for all types of insurance policies from homeowner’s to auto insurance and commercial insurance, the latter being outside the scope of this article.
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UPDATED: Sep 28, 2021
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If you’ve ever purchased insurance, you’ve likely heard your insurance agent throw around the word “exclusion” when talking about your policy specifics. Some insurance policies only cover set risks. For example, a hurricane policy would only cover damage resulting from a hurricane. Chances are if you’re in a high hurricane region, your standard homeowners policy has a hurricane exclusion.
Insurance policies are designed to restore you to where you were before an incident. Insurance companies have to balance their risk to stay financially stable. This means charging each insured for an appropriate amount of risk to pay out claims as they’re filed throughout the year. If they charge too much to account for risk many homeowners may never face anyway, they’ll lose business to more affordable competitors. If not properly balanced and managed, an insurance company could go belly up after one large fire, windstorm, or other disaster.
How do insurance exclusions work?
Insurance exclusions serve to protect an insurer from risk they are not interested in taking as well as to allow a person or organization to reduce their insurance costs by limiting their requested coverage. It’s a balancing act between the two sides. Many of the exclusions may seem obscure to you when you buy the policy. If you’re filing a non-standard (not one of the primary hazards like fire), you should be sure you know what you’re getting.
Some buyers choose named perils homeowners policies. They’re generally cheaper, and it’s simpler in a way. If the peril is not named, it’s not covered. Unfortunately, the worst hazards are often unexpected. Broader coverage policies offer you coverage for everything unless it’s excluded. If you read over your policy, you may realize there are a lot of exclusions.
The most common exclusions are within your control. For example, even if you have water backup coverage, your insurance company may exclude water damage if there are signed of neglect. In other words, if you see mold, mildew, rotting, and other signs of a long-term leak, your insurance company may refuse to cover the claim. Their logic is it could’ve been repaired for much less had you acted quickly when the leak or other water damage first started. No homeowners insurer wants to cover neglect.
Similarly, a homeowners insurance policy may cover your home while excluding things like dog bites based on things like restricted breeds. While some policies might not cover a home with a pool or trampoline, others may simply exclude damage or injuries associated with those types of additions.
Many exclusions are more general, though. They may exclude earth movement, power failure, war, nuclear hazard, and intentional loss to name a few.
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What hazards do auto insurance companies exclude?
Individuals are the most common type of exclusion in a personal auto insurance policy. Again, you may choose to exclude someone or the insurer may demand that you do so in order to issue a policy to you.
Typically for a personal auto insurance policy, you must list all persons living in your home 15 years of age and older. This is meant to capture anybody who might drive your car on a regular basis.
Those who you or the insurers don’t want to cover must be excluded. Ultimately, the insurance company would want an exclusion in place to deny insurance claims in the event of an accident caused by someone who is clearly a risky driver. They would need to have a separate policy. If they live in your house, though, some insurers may not want to take the risk instead just refusing your application.
The most common exclusion for drivers is simple: intentional damage. If you damage your own car on purpose, you could find yourself without the coverage for your property damage. You may also find yourself facing criminal charges for insurance fraud.
What drivers will a standard policy exclude?
1. Drivers, typically family members, with a history of accidents or tickets. Certain types of insurance companies are not comfortable with this level of risk.
For example, mom may be the safest driver in the world, and as a result, have great insurance coverage with a preferred carrier.
However, dad, or one of the kids may have a lead foot or a “talking on the phone while driving” problem.
As a result, your insurance company may write a policy for mom, but exclude the teenager or dad because they aren’t comfortable insuring risky drivers.
Mom and or dad may decide to exclude the kid just to keep their premium down, which would force the teen to seek insurance coverage elsewhere. If all these people are in the same household, insurance companies may still raise rates or refuse coverage altogether.
2. Persons living in your home, who do not have a driver’s license or have a suspended license must be excluded from an auto insurance policy when it is issued, or sometimes, mid-term on a policy if either of these events occur while the policy is in force. If an unlicensed driver gets in an accident in your car, an insurance company may only find out when a claim is filed. But it’s generally written into auto policies that the claim would not be paid.
3. Young or inexperienced drivers of any age are typically excluded from a commercial auto policy. This is why certain employers and car rental companies have strict age requirements for drivers. Personal policies simply see a sharp rise in rates when adding a teen driver.
A less common form of exclusion on a personal auto policy may be when a certain cause of loss is excluded. This is pretty cut and dry.
If you’ve ever bothered to read your entire policy, you probably noticed payments for losses resulting from drunken driving, racing, or using a vehicle in the commission of a crime are excluded (what isn’t covered under an auto insurance policy).
Are there other common exclusions with standard homeowners insurance policies?
- The aggressive dog breed is a very common exclusion
- Since there’s a good chance it will bite someone and result in a claim
- Earthquakes and floods are also excluded
- Meaning supplementary coverage may be necessary
Homeowners insurance has its own set of exclusions for people, animals and causes of loss. Yes, I said animals.
The most common and controversial animal exclusion is an “aggressive” dog, like a certain breed known for its questionable behavior.
There are multiple insurers in numerous states that require certain breeds of dogs to be excluded from homeowners insurance coverage, as they are most prone to biting people and initiating claims for liability.
Homeowners insurance more typically has exclusion for causes of loss, meaning they will not pay for damage resulting from certain events.
Earthquake and flood losses are the two most common insurance exclusions (how flood is defined by insurance company).
The exclusions and need for additional coverage will differ vastly based on the location of your home geographically.
It’s worth noting that for addition premium you can insure just about any cause of loss.
Your best bet is to speak with your insurer or independent agent to verify which causes of loss you are subject to based on your home location and be certain you are covered.
You may be surprised to find you’re not covered for losses such as wind damage and foundation damage, which are two of the most common reasons for insurance claims in the United States (what is covered under homeowners insurance).
As always, I recommend you purchase as much coverage for as many causes of loss as possible, even if you have to shuffle your budget to do so.
(photo: David Marsh)