What is an '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.

BREAKING DOWN 'Absolute Exclusion'

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.

How Absolute Exclusions Work

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.

  1. Full Reporting Clause

    A full reporting clause is an insurance provision requiring the ...
  2. Against All Risks - AAR

    An against all risks insurance policy provides coverage against ...
  3. Cooperation Clause

    An insurance contract clause that requires the policyholder to ...
  4. War Exclusion Clause

    A war exclusion clause in an insurance policy excludes coverage ...
  5. Work And Materials Clause

    Work and materials clauses allow holders of insurance policies ...
  6. Assessable Policy

    Assessable Policy is a type of insurance policy that may require ...
Related Articles
  1. Insurance

    Do You Need Casualty Insurance?

    Find out how different types of coverages can protect you and which policy is right for you.
  2. Insurance

    What To Do If Your Insurance Won't Pay

    Before paying for coverage, find out what you need to do to ensure you get paid.
  3. Insurance

    What Is and Isn't Covered by Homeowner's Insurance

    Understanding what your insurance covers can be confusing. Learn what almost all insurance policies have in common so you're prepared if disaster strikes.
  4. Insurance

    Homeowner's Insurance Guide: A Beginner's Overview

    Everything new homeowners need to know about homeowner's insurance to protect their residence.
  5. Insurance

    4 Common Misconceptions About Homeowners Insurance

    There are many misconceptions about homeowners insurance. These are the most common.
  6. Insurance

    5 Types Of Insurance You Can (And Should) Afford

    With insurance and warranties being offered on seemingly everything, it's hard to know what policies are worth your money. Learn about five affordable insurance policies that are worth considering.
  7. Managing Wealth

    6 Insurance Policies That Protect the Wealthy

    Here are six types of insurance that the wealthy use to protect their assets.
  8. Insurance

    How To Invest In Insurance Companies

    Knowing the special circumstances that insurance companies operate under helps in evaluating whether or not a listed insurance company is a good investment and whether the economic environment ...
  9. Insurance

    Insurance, Excess Insurance, and Reinsurance

    Understanding the differences between insurance, excess insurance, and reinsurance might help you avoid being overinsured or underinsured.
  1. Can your insurance company cancel your policy without notice?

    Learn about your rights as an insured when it comes to your insurance policy being canceled, including how to access your ... Read Answer >>
  2. How does the 80% rule for home insurance work, and how do capital improvements affect ...

    Learn what the 80% rule in homeowner's insurance is and what homeowners need to do so their insurance company covers the ... Read Answer >>
  3. What Damages are Covered by my Home Insurance or Auto Insurance?

    Generally, damage to an automobile will be covered by comprehensive car insurance, which is in addition to collision coverage. Read Answer >>
Trading Center