What is an Absolute Exclusion in Insurance?

Absolute Exclusion is a clause that can be found within certain insurance policies. The clause eliminates coverage of certain events under the policy. This clause allows the insurer to deny any claim that is remotely related to the actual nature of the exclusion. Insurance companies are legally obligated to provide forms where the absolute exclusions are clearly mentioned in plain words and simple language. If an insurance company deliberately provides obscure policy information or omits important information, or if they fail to provide clear and comprehensive forms to the policyholders, they may have face legal consequences.

How does an Absolute Exclusion Work? 

Insurance companies price the policy premiums after assessing the risks of loss. They need to collect enough premiums to pay all policy claims and make a profit. The insurance companies need to restrict the number of claims paid. As such, they exclude some of the events from the provision of insurance coverage. If an insurance company uses too many absolute exclusions in their policies, the customers may find it unacceptable. If the company provides coverage for an overly narrow set of risks, the customers wont choose their policies and, as a result, theyll lose business. It is important for insurance companies to carefully review how much risk they can cover and at the same time they need to ensure that their policies are adequately attractive to the customers. The absolute exclusion clause is often criticized for being obscure and ambiguous. The critics complain that it becomes impossible for the policyholder to derive whether an event is covered under that policy or not. The legal provisions of some states make it mandatory, if a loss is a result of a combination of covered and excluded events, the insurance company has to provide coverage if the covered event was the proximate cause of the loss. However, the companies often deny coverage, if the covered event is not closely involved in the loss. The language used for describing the events that are excluded from the coverage has evolved in the last five decades to provide clarity. In the 1970s most of the insurance policies would read like, "Coverage does not apply to .;" or "to any claim for;" or "to any claim based upon." During the late 70s and early '80s, insurance companies modified the language and exclusions to read as follows based upon or arising out of.", later it was further modified into "based upon or arising out of or in consequence of" The use of language became more critical, particularly for the environment liability cases. The insurance companies were struggling to find unambiguous exclusionary language that would help them to withstand court scrutiny.

Examples of absolute exclusion Language

• "Directly or indirectly, based on, attributable to, arising out of, resulting from, or in any manner relating" or
• "based upon, arising out of, or attributable to any wrongful acts where all or any part of such acts"

For example, homeowners insurance policy often excludes mold, fungus, or wet rot. That means even if the mold is caused by a plumbing defect, the insurance wont cover the loss that is the result of the mold. It will only cover the plumbing loss.

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