Insurance policies contain exclusions (also called exceptions) and are an integral part of policies. Some policies have few exclusions but the majority have a fair amount of exclusions. Why do policies have them and are exclusions on policies a necessary evil?
CATASTROPHES AND UNINSURABLE RISKS
Some risks are excluded simply because of the disastrous consequences that may result if they occur. Such risks as nuclear explosions and contamination and war can lead to the demise of an insurer. Governments have had to step in to provide compensation for these eventualities. A good example is Britain’s Pool Re, a collaborative effort between insurers and the government whereby if losses from acts of terrorism ever become so large as to exhaust its reserves, Pool Re would draw funds from the UK government to meet its obligations.
Most commercial policies exclude loss or damage by sabotage and terrorism but coverage can be arranged. It is now even possible to purchase political violence insurance which covers the following perils: 1. Act of Terrorism; 2. Sabotage; 3. Riots, Strikes and/or Civil Commotion; 4. Malicious Damage; 5. Insurrection, Revolution or Rebellion; 6. Mutiny and/or Coup D’état; 7. War and/or Civil War; 8. Looting.
Natural disasters such as earthquakes, hurricanes and flood have been insured because insurers have utilized the mechanism of reinsurance to spread the risk among a bigger group. Where an area has too many catastrophes, eventually insurance becomes unavailable. Government funded facilities like the CCRIF (a collaborative effort between Caribbean governments and the World Bank) provide some relief but thus far this has been restricted to government infrastructure. The US government-sponsored National Flood Insurance Program, is the only flood insurance available to the vast majority of Americans.
Some risks are considered to be against public policy (e.g. insuring smuggled goods) and deemed uninsurable. Some risks are also uninsurable because they are incapable of measurement and assessment (e.g. loss from depreciation of a currency, goods becoming obsolete).
MAINTENANCE TYPE CLAIMS
Some losses are excluded because insurers consider them to be the duty of the insured to take care of such losses. Costs associated with standard adjustment, rectifying functional failures and maintenance of an insured item are excluded. Some items suffer wear and tear from normal usage (e.g. bulbs, belts and other expendable parts) and this is excluded.
Insurance is based on the principle that the losses of the unfortunate few rest easily on the fortunate many. Trivial claims put an undue burden on the funds of the insured pool. Such claims almost wipe out the premiums paid by those making the claims. Therefore, insurers seek to eliminate such claims by the imposition of excesses (also known as deductibles). The amount of the excess is excluded as the insured bears this for his own account.
Some risks are excluded as a precautionary measure because of the high risk level. Insurers may still grant cover if they get all the relevant details and may impose special terms and an additional premium. An example would be the ‘vibration, removal or weakening of support’ exclusion under a contractor’s all risks policy. Another example would be a ‘pollution and contamination’ exclusion.
Some policies contain warranties on policies which place an obligation on an insured to fulfil some condition (e.g. not to store hazardous waste on the premises or to keep stocks on pallets of a certain height). While warranties are designed to improve risks, they do have the same effect as exclusions as insurers may not pay a claim if a warranty is breached.
PROVINCE OF OTHER INSURANCES
Some policies exclude risks that ought to be covered under another policy. A public liability policy would exclude injury to employees of the insured as this should be insured under a workmen’s compensation policy. A fire commercial policy and other property policies would exclude consequential losses or loss of profits as these should be covered under a business interruption policy.
Some policies exclude loss or damage due to defective workmanship, faulty design or materials as this is the province of special policies.
RESPONSIBILITY OF OTHERS
A policy may have an exclusion that relates to a risk that is the responsibility of a third party. An item insured under am electronic all risks policy may suffer damage that is picked up under the sales warranty. A rental agreement may impose responsibility for loss or damage to the party renting the equipment, and therefore the owner’s policy may exclude such loss or damage.
READ YOUR POLICY
While it may be great to have no exclusions on policies, it is wishful thinking. Exclusions do play a role in making insurance viable and practicable. It is important to read one’s policies and get familiar with the exclusions so that one is not caught off guard but knows what to expect in the event of a loss.
The policyholder should contact their broker or insurance company for clarification and further information.