Exclusively from Foa & Son
Every insurance policy has two basic parts, an insuring agreement that states what is insured, then a list of exclusions that exclude or limit coverage for certain types of claims. Policy exclusions can seem on the surface to sometimes be random or capricious, but there is actually some rhyme and reason to them. It’s worth understanding why exclusions are added to insurance policies.
In general, exclusions will fall into three types. The first type is for events or occurrences that are just so large or catastrophic that they are simply not insurable under almost any circumstance. A good example of that would be exclusions for claims arising from war or nuclear explosion found in property policies. Unlikely as they may be, both events would result in the types of damage that might otherwise be insurable in a property policy, but the potential magnitude of ensuing damage and claims could literally bankrupt an insurance company, and potentially even the entire insurance industry. Events of this type are not insurable simply because of the potential magnitude of claims that could arise from them. Closely related are claims from terrorism, which since 9/11 are also excluded. These could be large claims, but they also suffer from being utterly unpredictable. An insurance company that can’t reasonably predict claims can’t develop a premium. These are also uninsurable (absent a government program).
The second type of exclusion is for predictable claims. Another example from property policies is the exclusion for claims arising from gradual wear and tear, deterioration or depreciation. Policyholders are expected to maintain their property and fix things as they wear out. General liability policies exclude claims from faulty workmanship. If you do a job incorrectly, that’s your problem, just a risk of being in business; no insurance company wants to be in the business of insuring competent workmanship.
There’s a third class of exclusions that generally add to the complexity of policies, for types of claims that are insurable, but that properly need to be insured somewhere else. A basic example is the exclusion for auto claims on the general liability policy. Auto claims are certainly insurable, and a robust market exists to supply such insurance. The GL policy excludes these claims because it’s just not the right place for them to be covered.
Other examples of these types of exclusions would include the one for employee dishonesty in a property policy. If you want that coverage, buy a crime policy. Property policies exclude claims from boiler explosion or electrical short circuits. If you want that covered, buy an equipment breakdown policy. We’ve written recently about pollution exclusions in policies, particularly the GL policy. Sure, most policies exclude pollution these days, but if you need that coverage, pollution policies are readily available.
Insurance policies can seem confusing, no doubt, but there is generally some bedrock reason for the exclusions they contain.