Absolute Exclusion

What is 'Absolute Exclusion'

An insurance policy clause that eliminates coverage of certain events. Absolute exclusions allow insurers to deny coverage of claims regardless of how the event came to be, provided that the exclusion is plainly worded and that it makes clear what specifically is being excluded from coverage.

BREAKING DOWN 'Absolute Exclusion'

Insurance companies must balance the types of coverage that they offer with the likelihood that a claim will be made. If they agree to cover too many risks they may open themselves up to an increased number of claims, and if they cover an overly narrow set of risks then they won’t be able to sell any policies. Insurers use absolute exclusions to make it clear what they are and are unwilling to cover in a policy, regardless of how an event comes to pass.

Insurance policies are increasingly likely to contain one or more absolute exclusion clauses. Critics of the use of absolute exclusions point to the ambiguity associated with how clauses may be written, which can make determining what is covered and what is not 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 then 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 policyholder’s claim may be denied.

For example, a homeowner purchases a policy that does not cover mold damage (a mold exclusion clause). One evening, the pipes underneath the upstairs bathroom sink burst, and water leaked into the walls and flooring. In addition to the water damage to wood and flooring, mold also began to grow. The policyholder may make a claim that all of the damage was the result of the water, while the insurer may claim that the mold damage will not be included (regardless of cause) because the policy had a mold exclusion clause. If the insurer plainly and precisely communicated that mold is not covered then the insurer can deny coverage.