“It’s nothing more than a way for companies to screw you out of money.”
“It’s a scam.”
“It’s legalized extortion.”
Those are direct quotes from my students — students who work as apprentices at insurance companies.
Every semester, in week one of my risk management and insurance course, I ask what they think of insurance. I can’t even publish some of the responses from students who don’t work in the industry.
Many policyholders would probably agree. They pay hundreds or even thousands of dollars in premiums each year, only to find out their policy won’t cover mold damage, a burst pipe or a sewer backup. It can feel like exclusions are designed to deny rather than define coverage.
But exclusions aren’t scams or legalized extortion. They serve important functions in the insurance system — if you know what to look for.
Why insurance exclusions exist
As a claims adjuster, I’ve written countless declination letters and taken my share of angry phone calls. But now, as a professor, I spend 16 weeks showing students why every insurance policy has exclusions and why they’re necessary.
Reason 1: Exclusions keep policies affordable
Insurance isn’t priced like a traditional product. It’s not a toaster. You’re not buying a guarantee that nothing bad will happen — you’re sharing financial risk with thousands of other policyholders. And your premium is only a fraction of the total cost of managing that risk.
Think about what it would take to replace your home, your car or everything you own. Now look at your annual home or auto premium. It doesn’t come close — and it’s not supposed to.
Even a small fire or water loss can cost tens of thousands of dollars. If your policy covered every frequent, high-cost loss — like water backups, foundation cracks or mold — your premium would have to reflect that risk. And for many, that premium would be unaffordable.
That’s where exclusions come in. They carve out the costliest, most common and most complex claims to keep the baseline policy accessible. Many carriers offer optional add-ons to buy back coverage through endorsements — but they’re not free. And that’s the tradeoff.
As with any business, there are also hidden costs the consumer doesn’t see. Insurance carriers don’t just collect premiums and write checks — they also pay for the infrastructure that makes those checks possible, including:
- Administrative staff who ensure compliance with state regulations
- Adjusters who investigate and settle claims
- Attorneys who defend policyholders in lawsuits
- Actuaries and accountants who determine how much money needs to be set aside to pay for future losses — including catastrophic ones.
How this impacts policyholders
You can get a cheaper policy by not adding endorsements or carrying less coverage, but what you save in premiums, you may pay later in uncovered losses. When that happens, you won’t remember the savings — you’ll remember the denial letter. That’s why it’s important to carefully review what your policy covers and compare the cost of endorsements with the potential out-of-pocket cost of a loss from an excluded peril.
Reason 2: Some coverage belongs in another policy
Some losses are excluded because they’re already covered elsewhere.
Think of insurance like medical specialties. All doctors go through the same basic education, but eventually they specialize. You wouldn’t ask your eye doctor to treat your heart condition. That’s not their area of expertise.
It’s the same with insurance. A homeowners policy doesn’t cover a car accident — that’s what auto insurance is for. But if someone steals your clothes from inside your car, that would be a homeowners claim. Your personal property (contents) falls under the homeowners “specialty,” even when the loss happens off site.
Each policy is designed to handle specific risks. Excluding coverage from one policy doesn’t mean it’s not insurable — it just means it belongs in a different “department.”
How this impacts policyholders
When I anticipate a coverage denial, I make a point to notify the policyholder’s agent. I also flag whether another policy might apply.
For example, if a thief broke into your car and stole personal items, the busted window would be covered under the comprehensive portion of your auto policy. But your stolen laptop? That’s personal property — and should be filed under your homeowners policy. Discussing losses with your agent can help you get paid out sooner since you’re not waiting on a new claim to be opened and investigated.
It’s worth noting that some insurers incorrectly deny valid claims just because someone else is responsible for the loss. For example, if a car hits your home, that accident would be covered under your homeowners policy. Many carriers mistakenly believe that because the loss involves an auto, they should deny their policyholder’s claim. That is incorrect. The home carrier would be responsible for handling the loss; the insured would pay their deductible; then the carrier would seek reimbursement from the at-fault driver or their carrier.
Reason 3: They encourage maintenance
Here’s where it gets nuanced — and maybe a little frustrating.
Insurance covers accidental losses. In industry terms, we call this a fortuitous loss. If the loss was intentional, expected or inevitable, it’s likely excluded.
That’s why wear and tear isn’t covered. It’s not an accident; it’s part of normal use. However, many policies will provide coverage for the ensuing damage caused by a wear-and-tear event. By excluding wear and tear, some damage is still covered, but policyholders are incentivized to do regular upkeep. For example, homeowners who maintain their roofs can potentially avoid leaks during big storms.
This strategy helps catch potential issues early and avoid claims — helping keep costs lower for all policyholders.
How this impacts policyholders
As an adjuster, I’ve seen water damage caused by worn-out pipes that burst. The pipe itself wasn’t covered, because the damage to the pipe is wear and tear. But the water damage to cabinets, flooring and drywall was because the water damage was sudden and accidental.
Unfortunately, I’ve seen agents — and even adjusters — miss this. Understanding exclusions and endorsements can make a difference in whether your claim gets paid in part or denied outright.
What insurance exclusions mean for you
Insurance exclusions can be frustrating, but they help keep premiums reasonable and policies focused. They also prevent overlaps between different insurance products. To understand and manage your policy’s exclusions, consider the following steps:
- Read your declarations and endorsements carefully. Don’t rely on assumptions about what’s covered.
- Talk to your agent about add-ons. Many exclusions can be covered through endorsements or supplemental policies for an additional cost.
- Consider your risk exposure. If you don’t have coverage for flood, earthquake or sewer backup, a major loss could cost you out of pocket.
- Carefully review any denials. If all or part of your insurance claim gets denied, but you believe it should have been covered, you can file an appeal. In some cases, you might consider working with a public adjuster or filing a complaint with your state’s department of insurance.
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