Definition and Examples of Business Insurance Exclusions

A business insurance exclusion is a provision in a business insurance policy that eliminates coverage for certain types of risks. Some exclusions are broad, precluding coverage for a wide range of claims. For example, virtually all business auto policies exclude liability coverage for any covered auto while used in any professional or organized racing or demolition contest. The “racing” exclusion is absolute and contains no exceptions. Other exclusions are relatively narrow and apply only in certain circumstances. An example is the “vacancy” exclusion found in the standard commercial property policy. It excludes damage to vacant buildings caused by certain perils, but only if the building has been vacant for more than 60 days.

How Business Insurance Exclusions Work

In an insurance policy, coverage is provided by the insuring agreement, then narrowed and refined by the exclusions. Because they reduce or eliminate coverage, exclusions help define the scope of insurance afforded by the policy. While some exclusions are non-negotiable (meaning insurers rarely remove them), many can be modified or deleted for an additional premium. For example, the standard commercial auto policy contains a broad pollution exclusion that excludes (among other things) claims that arise from the release of pollutants being transported by a covered auto. Suppose you own a business that manufactures organic fertilizers and your firm uses trucks to deliver products to customers. You’re concerned that if a company-owned truck is involved in an accident that causes a fertilizer spill, any third-party claims that result from the spill may not be covered due to the pollution exclusion. To protect your business, you pay an additional premium for an endorsement that adds back some coverage for pollution-related claims by modifying the pollution exclusion.

What Can Be Excluded?

Many risks excluded by business insurance policies fit one of the three categories outlined below.

Catastrophic

Some risks, such as wars, floods, and earthquakes, are excluded because they can impact many policyholders at once, generating catastrophic losses for insurers. Some catastrophic risks can be insured under specialized policies or endorsements. For example, businesses can protect themselves against flood damage to buildings and personal property by purchasing flood insurance.

Policies that cover physical damage to business-owned property often exclude risks that are inevitable or that can be prevented through proper maintenance. For example, commercial property policies exclude damage to property caused by wear and tear, rust, or corrosion. Likewise, commercial auto physical damage insurance excludes damage to tires caused by blowouts, punctures, or other road damage.

Intentional or Illegal Activity

Many insurance policies exclude claims that result from intentional or illegal acts committed by the insured. For example, commercial property policies preclude damage to property caused by a dishonest or criminal act by the insured, a company principal, or employee.  If this exclusion didn’t exist, a business owner could, say, set fire to company-owned property, then obtain compensation for the damage by filing a fire-damage claim under their property policy.

Exceptions to Business Insurance Exclusions

While some exclusions are absolute, many contain exceptions that give back coverage if certain conditions exist. For example, the standard general liability policy excludes claims that arise out of the ownership, maintenance, or use of watercraft. An exception applies to watercraft you don’t own that’s less than 26 feet long and not used for commercial purposes such as transporting people or property for a charge. To see why the exception is important, suppose your business rents a 25-foot powerboat to entertain a client. You are piloting the boat in a harbor when you accidentally hit a water skier. If the skier is injured in the accident and files a claim against your business, your general liability policy should cover the loss due to the exception described above.

Where To Find Your Business Insurance Exclusions

Business insurance exclusions can be located anywhere in the policy, but most appear in a section entitled “Exclusions” or something similar, such as “Losses Not Covered” or “Property Not Covered.” A policy that provides more than one type of coverage will likely include a separate list of exclusions for each coverage. An example is the standard business owner’s policy, which provides both general liability and commercial property coverages. The policy contains two sets of exclusions: one for liability coverage and one for commercial property. An example is the definition of “auto” found in the standard business auto policy. “Auto” is defined as a land motor vehicle, trailer, or semi-trailer designed for travel on public roads, but does not include mobile equipment, which is also a defined term. The definition of “auto” excludes any vehicle that falls within the meaning of “mobile equipment.”

Excluded perils or causes of loss (i.e. floods and earthquakes)Excluded losses (damage due to auto wear and tear)Excluded property (automobile or pet, for example)

title: “The Purpose Of Business Insurance Exclusions” ShowToc: true date: “2022-12-12” author: “Natalie Ellington”

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Reasons to Exclude Risks

Insurance policy exclusions serve various purposes but most apply to risks that fall into one of the categories described below.

Catastrophic Events

Some risks are uninsurable because they are catastrophic events. An example is war. If a war breaks out and a bomb damages your business property, your commercial property policy won’t cover the loss. Virtually all property policies exclude damage caused by war and military action.

Covered by Another Policy

Many risks are excluded under one type of policy because they are covered by another. For instance, auto liability claims are excluded under a general liability policy because they are covered by a commercial auto policy. Similarly, liability and auto policies exclude any benefits the employer is obligated to pay under a workers’ compensation law since such benefits are covered by workers’ compensation insurance.

Maintenance Issues

Some risks, such as wear and tear, are excluded because they are naturally occurring events that can be controlled by the policyholder through proper maintenance. Damage caused by wear and tear is excluded from both commercial property policies and auto physical damage insurance. Other risks that can be controlled through regular maintenance are rust, corrosion, and insect infestations.

Against Public Policy

Many insurance policies exclude crimes, violations of the law, and intentionally caused injuries because insuring them would be against public policy. For this reason, liability policies don’t cover claims arising from the insured’s intentional, harmful acts like firing a gun or committing fraud.

Exclusion Exceptions and Buybacks

Many exclusions contain exceptions that give back a limited amount of coverage. An example is the contractual liability exclusion in the standard general liability policy, which excludes liability assumed under a contract. An exception to the exclusion provides coverage for liability assumed under an insured contract (a defined term in the policy). Some exclusions can be eliminated if you’re willing to pay an additional premium. For instance, the standard general liability policy excludes claims arising out of injuries inflicted by one employee against another. Many businesses buy back coverage for co-employee claims by purchasing fellow employee coverage.

Watch for Changes

Policy forms aren’t cast in stone. The Insurance Services Office (ISO) updates the standard commercial policy forms every few years. Insurers often follow suit, incorporating the changes the ISO has made into their proprietary forms. When the ISO or an insurer revises a form, it may add new exclusions or modify existing ones. A new exclusion generally means a reduction in coverage while an exclusion modification may broaden or restrict coverage.

Where to Look for Exclusions

An obvious place to look for policy exclusions is under the section titled “Exclusions.” Many policies contain more than one list of exclusions. For instance, the standard business owners policy contains two sets of exclusions, one for property and another for liability. Some policies also contain a separate list of exclusions that apply to all coverages. Many policies contain one or more sections entitled “limitations”. A limitation is a partial exclusion and narrows the scope of coverage for a covered risk. For instance, theft is a covered peril under the standard business owners policy, but theft losses involving furs, jewelry, and other valuable items are subject to a $2,500 limit.

Alternate Locations

Exclusionary provisions can be found in other parts of the policy, not just the Exclusions section. One of the most common places for them to appear is in the policy “Definitions.” Insurers define terms to attach specific meanings to them and narrow the scope of interpretation. For example, the standard business auto policy defines the word “auto” as a land motor vehicle, trailer, or semi-trailer designed for travel on public roads. The definition excludes mobile equipment, which is also a defined term that encompasses a broad array of machinery and equipment. Another place where exclusions can be found is in the policy “Conditions” section. For instance, the standard business auto policy contains a provision that essentially excludes accidents that occur outside the defined “coverage territory.” This provision appears in the general Conditions section, not the Definitions. Finally, many insurers add exclusions to policies by attaching endorsements to preprinted forms. An endorsement may add a new exclusion or modify an existing one.