Business insurance is an invaluable tool to cushion a business from risks like property loss, liability claims, and business interruption. Unfortunately, many business owners assume their policy protects against all sorts of losses. According to Charles Spinelli, in reality, policies also come with a list of exclusions – specific events or things that the insurer is not obligated to cover.
Precisely, exclusions refer to events or circumstances where there is no coverage for loss. Knowing the common exclusions is essential for business owners to manage risk, take protective steps, and avoid surprises when a loss occurs. Here is a list covering exclusions in business insurance.
Acts of War and Terrorism
Typically, war, military action, and terrorism-related risks and losses are explicitly excluded in most standard business insurance contracts. In some cases, a handful of insurers sell separate terrorism insurance policies or attach them as riders (added coverage on additional premium) to their policies based on The Terrorism Risk Insurance Act (TRIA) in the US.
However, terrorism coverage is usually not standard in any other insurance product; the reason for such exclusion is that the events can produce catastrophic losses and an insurer would have difficulty quantifying or predicting them.
Flood and Earthquake Damage
Usually, natural disasters like storms, floods, and earthquakes will not be covered under general policies. To protect them, business owners must obtain specific types of natural disaster insurance/ business interruption insurance (flood, windstorm, fire, earthquake) if their business location is susceptible to high risk according to Charles Spinelli. The concept is that these sorts of disasters can cause widespread, extensive damage, which creates huge risks for the insurer.
Wear and Tear or Maintenance Issues
While accidental or sudden losses are to be covered by insurance, slow deterioration or damages due to lack of maintenance are not. Hence, the insuring agreements usually exclude losses due to wear or tear, rust or corrosion, or failure to maintain any equipment. The business owners are expected to keep their property and machinery in good shape and maintain them to avoid losses.
Employee Dishonesty and Fraud
Most general business policies will not cover loss from dishonest or fraudulent acts by employees. Companies will need to obtain fidelity bonds, or employee dishonesty insurance if they want protection against internal theft, embezzlement, or fraud. This exclusion highlights the necessity of strong internal controls, employment of surveillance equipment like CCTV, and periodic audits.
Cyber Attacks and Data Breaches
Cyber risks have become widespread incidence in the modern world with the increased dependence of businesses on digital platforms. Yet, the losses due to cyber-attacks, hacking, or data breaches are usually excluded under traditional or general commercial insurance policies.
However, to get coverage against losses of hacking, data breaches, etc, businesses should look forward to having stand-alone cyber liability insurance to protect themselves against such issues and recover costs.
Pandemics and Communicable Diseases
The COVID-19 pandemic revealed a notable gap in coverage within business insurance. Most business insurance policies do not cover losses due to business interruption stemming from communicable diseases or pandemics often causing mandatory shutdowns. Although there may be exceptions that come added with specific policies according to government mandates, the plan emphasizes the necessity for crisis planning and diversified risk mandate.
Recognizing what is not included in business insurance is highly important for business sustainability and growth. By identifying potential exclusions and obtaining additional coverage where needed, businesses can strengthen their risk management strategy.