How Do Policy Exclusions Work?

Insurance policies follow the adage that “what is giveth is taketh away.”  The vast majority contain broad grants of coverage in the opening pages, only to be followed by numerous exclusions several pages later.  Thus, a policy may say that it insures you against all damage or loss to a house, only to tell you later that the specific damage to your house is excluded. 

Every policy should be examined for unique exclusions in light of the particular circumstances of the risk being insured.  The exclusions most commonly found in homeowners policies, for example, include:

  • Wear and tear or deterioration (e.g., worn-down property)
  • Water damage (including flood damage)
  • Earth movements (e.g., earthquake, landslide, volcanic eruption, or sinkholes)
  • Seepage or leakage (e.g., typically associated with home appliances)
  • Sewer backups or overflow (e.g., a toilet backup)
  • Third party negligence (e.g., negligent construction by a contractor)
  • Insured’s own neglect (e.g., failure to protect property from further loss)
  • Infestations (e.g., bedbugs, termites, mice and other vermin)

Even though these exclusions may be common, every exclusion must be viewed with scrutiny and with the help of a qualified professional.  Insurers know that insureds cannot understand the majority of the exclusions in their policies just by reading them, but they continue to use confusing language because courts have clarified precisely what they mean, providing stability for underwriting purposes.  Thus, it is fair to say that many exclusions are written for the lawyers, not the insureds.

Further complicating things, sometimes the fine print matters, and sometimes it doesn’t.  While a few words can change the entire meaning of one exclusion, the specific words in another may not matter at all, as courts have established what they mean irrespective of the language used.  Exclusions may also take on different meanings based on other aspects of the policy.  In some instances, seemingly clear exclusions are legally unenforceable because of their form, substance or both. 

Knowing the different duties the insured and the insurer each has is also important to ensure the insurer is fulfilling its duties on a claim.  While the insured has the duty to prove that a loss is covered under the broad coverage provisions (subject to the insurer’s duty to investigate the loss for coverage), it is the insurer’s duty to prove that an exclusion applies (subject to the insured’s duty to cooperate with the insurer’s investigation). 

Knowing how the insurer is required to interpret exclusions can also bear significantly on a claim.  Insurers are legally required to interpret exclusion clauses narrowly and in favor of coverage wherever possible.  In practice, however, adjusters may not be fully trained on their legal duties.

Since policies differ – even those from the same insurance company – the best way to understand the exclusions and how they may apply to a claim is to have a professional evaluate the issue. Brokers and agents can be helpful, but ultimately, what an exclusion will mean is governed by the law and an attorney specializing in insurance law is in the best position to help.