Exclusion
A specific condition, cause, or type of loss that a policy explicitly does not cover.
An exclusion is a provision in an insurance policy that removes certain risks or losses from coverage. Exclusions define the boundaries of what an insurer will pay for. Common homeowners insurance exclusions include flood damage, earthquake damage, normal wear and tear, intentional acts by the policyholder, and losses from war or nuclear hazard. Standard auto policies often exclude commercial use, track racing, and deliberate damage.
Exclusions exist because certain risks are either too catastrophic (flood, earthquake), too predictable (wear and tear), or too subject to moral hazard to price and pool efficiently in a standard policy. Policyholders who need coverage for excluded perils must purchase separate policies or endorsements—flood insurance through the NFIP, earthquake coverage as a rider, or commercial auto coverage for business use.
Always read the exclusions section of any policy carefully before buying. Misunderstanding exclusions is the most common source of "I thought I was covered" disputes at claim time. Ask your agent specifically about any peril you are concerned about.
Real-World Example
The homeowner was surprised to learn that her standard policy's flood exclusion meant the $40,000 basement flood caused by heavy rain was not covered—she had no flood insurance.