Policy exclusions

What it means

Exclusions are the cases an insurer has carved out of its cover in advance. The event happens and looks like an insured event from outside, but because it falls under an exclusion nothing is paid and the real scope of cover is narrower than the product name suggests.

An exclusion is not an excess, where the insurer pays and deducts an agreed amount, nor a waiting period, after which cover begins. Exclusions are written into the policy conditions, and those form part of the insurance contract.

An exclusion has to be told apart from a breach of the insured’s obligations. Under an exclusion the insurer pays nothing, because the event was never covered. If the insured merely breached a duty, reporting the loss late or concealing a material fact, say, the event is covered, but the insurer may reduce the insurance benefit proportionately.

How it works in practice

Some exclusions sit in every policy: war, a nuclear event, a deliberate act by the insured, sanctioned countries. The rest depend on the product and those decide claims: wear and tear, neglected maintenance, unpatched software under cyber cover.

In motor third-party liability a fault of the driver is not answered by refusing the victim: the insurer pays the claim and, in the cases the Act lists, such as driving under the influence or leaving the scene, recovers the money from the driver by way of recourse. So the exclusions are compared before signing, not after a loss.

In liability insurance a common exclusion is a contractual penalty, a fine from an authority, or an obligation the company took on beyond what the law requires. When a client signs a customer contract with heavy penalties it pays to check it against the policy terms, because that part of the risk is usually not insured.

What to watch out for

In property cover the condition that stock must be stored above floor level at a prescribed height gets overlooked. After the warehouse floods the insurer declines the whole stock item and the company carries the loss itself, having paid premiums for years.

The company switches insurer and the new policy excludes losses from causes that arose before it began. A mistake made under the old policy only surfaces after the switch and neither insurer covers it. When moving, retroactive cover has to be checked and agreed, otherwise there is a gap in protection the company does not know about.