Absolute Exclusion

An absolute exclusion is an insurance policy clause that eliminates coverage of certain events. This type of clause allows insurers to deny coverage of claims regardless of how the event came to be, even if the claim only relates to the type of exclusion remotely. Insurers use absolute exclusions to clarify what events they will not cover in a policy, regardless of how an event comes to pass.

Insurance companies must provide policyholders with plainly worded forms that any absolute exclusions clear. If insurers willfully obscure or omit policy information or fail to provide clear, comprehensive forms, policyholders somteimtes take them to court for bad faith insurance practices.

In recent years, absolute exclusion causes seem to happen more frequently. However, too many absolute exclusions in policies can create a problem for an insurance company. Insurance companies calculate risk carefully and price policy premiums accordingly. The price of premiums reflects how much money an insurance company needs to collect in order to confidently underwrite all of their policies.

If a company agrees to cover too many risks, it opens itself up to an increased number of claims, putting itself at risk of insolvency. However, if through use of absolute exclusions, a company covers an overly narrow set of risks and customers become dissatisfied with their coverage, the company won’t be able to sell many policies.

Critics of absolute exclusions point to the ambiguity with which companies often phrase these clauses, which can make determining what is covered difficult to parse out when a number of events occur in close succession. In some states, if the loss is caused by a combination of covered and excluded events, the loss is covered if the covered event was the proximate cause of the loss. However, if the covered event was only remotely involved in the loss, then the company often denies the policyholder’s claim.

Let’s say a homeowner purchases a policy that does not cover mold damage. This policy has an absolute exclusion clause for mold. One evening, the pipes underneath the upstairs sink burst and water leaks into the walls and flooring. In addition to the water damage to the wood and flooring, mold begins to grow in the walls, as well.

The policyholder  make a claim that water caused all of the damage. However, due to the mold exclusion clause, the insurer refuses to cover the mold damage, and only cover the damage that the sink caused to the flooring and wood.