The Purpose of Business Insurance Exclusions

Learn why they’re included and where to find them

Insurance agent explaining car damage coverage
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There are many types of business insurance policies and each may likely contain exclusions, which eliminate or reduce coverage for claims that result from certain risks. Consequently, it’s important to understand why they’re included, where you can find them, and how they may affect the scope of coverage provided by your policies.

Key Takeaways

  • An exclusion is a provision in a business insurance policy that eliminates coverage for certain types of risks.
  • Many risks excluded by business insurance policies fit into categories including catastrophic, maintenance-related, and intentional/illegal activity.
  • While some exclusions are absolute, many contain exceptions that give back coverage if certain circumstances exist.
  • Most exclusions are located in the exclusions section of the policy, but others can be found in different areas, such as the definitions section.

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.

Exclusions can vary widely from one policy to another. This is especially true when policies aren’t written on standard forms.

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.

Maintenance-Related

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.

In general, insurance policies don’t cover injury or damage caused intentionally by the insured.

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.

Another place to look for exclusions is the “Policy Definitions” section, where insurers define terms to clarify their meaning and limit their scope, often using exclusionary language.

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.”

Frequently Asked Questions (FAQs)

What are the most common exclusions in an insurance policy?

The three major types of exclusions found in business insurance policies are categorized by: 

  • 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)

What is not covered under a business auto insurance policy?

There are a few notable exclusions from commercial auto insurance policies. For example, these policies cover bodily injury and property damage liability, but not if they were done intentionally. Other examples of auto insurance exclusions include damage or injury from pollution (unless you have a rider), a subcontractor’s contractual liability, and injury or damage caused by handling of property before or after loading and unloading from a business vehicle.