How to identify exclusions in your business insurance policy Featured

7:00pm EDT December 26, 2010

There may not be a worse feeling than when you find out a recent business-wrecking disaster isn’t covered under your insurance. However, with some due diligence, you can avoid facing that nasty surprise.

“Insurance policies give you coverage, but they take it away through exclusions,” says Rick Theders, CEO of Clark-Theders Insurance Agency. “Then, to further confuse the issue, different insurance companies will offer enhanced coverages that give you some coverage back for those excluded items.”

Smart Business spoke with Theders about how to untangle the web of exclusions to find out what is and isn’t covered under your policy.

What is covered under property insurance, and what is typically excluded?

Typically, the insurance company will pay for direct loss to property as defined by a covered loss. It provides a definition of ‘covered losses’ and takes care of those items unless coverage is specifically excluded. That is where you get into the standard exclusions that apply to property and liability — or both.

One exclusion is ordinance of law, when zoning changes or building code changes. For instance, if an older building built to standards in 1920 would have to be rebuilt to 2010 standards, the additional building expenses resulting from code changes and restructuring would be excluded from your property insurance policy. But there are opportunities to purchase additional coverage that will respond to that. Other examples of commonly excluded provisions are earthquake, flood, mudslide, sewer back-up, fungus and mold.

Exclusions under an insurance policy are typically intended to say that this insurance provision is better insured elsewhere by a different coverage part. As flooding is excluded from your property policy, and you are in a flood-prone area, you should buy flood insurance. If you live on top of a hill and aren’t concerned with a flood, you may choose not to buy it.

How do insurance policies handle terrorism?

Many policies state they cover everything except earth movement, government action and war, which is not covered under any property insurance policy. War is defined as one nation declaring military action against another. That is why 9/11 was not considered a war; it was an act of terrorism. Terrorism is not defined as a war, so it is included in coverage.

You can opt out of the federal government’s terrorism insurance. I think it’s an unwise thing to do, but you could choose not to have the federal terrorism reinsurance under your policy. If you reject that and a terrorism event impacts your property or hurts someone, it would be pennywise and pound foolish. You’re spending a few dollars for the contingency that something could happen, but if something did happen, it could be devastating to your property and/or liability.

What are some exclusions from liability policies?

A general liability policy pays those sums that the insured becomes legally obligated to pay because of injuring someone’s body or damaging others’ property in the conduct of your business. Some are insurable by separate coverage, like workers’ compensation coverage. An example of an uninsurable area is an intentional act, in which you plan and carry out an intentional injury to others. Another example of an exclusion from liability policies is liquor liability. Most companies would not need it, but if you are a tavern owner, you would need to purchase separate coverage, because that is your business. To further confuse the issue, some insurance companies will offer additional enhanced coverages that give you some coverage back for excluded items.

How does enhanced coverage work?

Say your policy excludes liquor liability. That’s OK if you don’t sell liquor. But if you have Christmas parties, or entertain vendors or suppliers by buying them lunch, does that mean you don’t have coverage for alcohol in that situation? Under your general liability policy, you should have what’s called host liquor liability coverage. It’s not your business to distribute liquor, so insurance companies will give coverage back for incidental host situations.

It’s confusing. Insurance companies give coverage and take it away.

How can businesses find these exclusions in their coverage?

It is the responsibility of anybody who purchases insurance to read and be familiar with the provisions of the contract. That’s why you should make sure your insurance agent or broker is familiar with your business, so he or she can do a better job of analyzing your coverage needs. What a shoe store owner needs might not be necessarily the same for a publisher, for instance.

The agent or broker needs to understand the business and make sure that insurance policies are modified to provide the necessary coverages that the customer chooses to purchase and should protect business for property liability along those lines. It is the insurance company’s responsibility to show where coverage does not apply. Agreements state what’s covered and what is not. Then, enter limitation or exclusion areas, then enhanced areas.

That’s part of the competitive edge certain insurance companies claim over others. If one company gives you $10,000 of water backup coverage, another may give you $25,000. Not only do companies compete over pricing, they also compete in the coverage provisions by offering additional coverage of areas of exclusions or limitations. It requires an understanding of the policy that is purchased. That is why a close relationship with your agent or broker is so important.

Rick Theders is CEO of Clark-Theders Insurance Agency. Reach him at (513) 779-2800 or