WHY DO EXCLUSION EXIST IN INSURANCE CONTRACT?

An important part of all insurance contracts is exclusion.

Exclusion is the part of an insurance contract that lists out losses, risks, and properties that are not covered by the insurance policy.

Exclusions are included in insurance contracts for a variety of reasons, including:

1. The peril is not commercially insurable: Some perils like wars are not commercially insurable.

This is because the losses resulting from such perils are usually catastrophic so that no insurance company can insure them.

Remember that one of the basic features of an insurable risk is  that "it must not be non-catastrophic."

For example, when there is war, the financial consequence is so significant that no insurance company can protect against it.

As a result, most insurance policies exclude losses caused by war.

2. To protect against non-accident losses: Another characteristic of an insurable risk is accidental losses

Exclusions are occasionally included in insurance policies to limit the coverage of non-accidental events or losses

Non-accidental losses are difficult to foresee and measure, which makes coverage expensive.

Hence, most insurance company tends to reduce coverage of non-accident losses as much as possible.

The following non-accident losses are typically excluded from insurance contracts

A. Losses caused intentionally (by the insured). For instance, an insured may set fire to his home in the hopes of receiving compensation for fire insurance damages.

B. Losses that occur naturally or that are certain to occur.

An example is wear and tear, which is usually excluded from property insurance coverage.

3. The peril is better covered by other insurance policies:  Some exclusions exist to prevent duplication of coverage by different policies.

Homeowners' liability insurance, for example, does not cover automobile liability, which is better covered by automobile liability insurance.

Duplication of insurance coverage reduces the insurer's capacity to discriminate among insureds and creates a moral hazard if the same loss is paid twice.

To address the problem, most insurance policies have a clause called other insurance clauses.

An "other insurance" clause is a provision found in both property and liability insurance policies that specifies how loss is to be apportioned among insurers when multiple policies cover the same loss.

4. Coverage not needed by the insured: Exclusion exists not just to minimize duplication, but also because the insured may not truly require it.

People who purchase home insurance, for example, do not always require car insurance.

5. For the protection of public interest: Exclusion is also specified in the insurance contract to protect the public interest.

Because insurance is a legitimate business, it is common for an insurance policy to exclude the use of the covered property for criminal or illegal purposes.

Recalled that one of the essentials of a valid insurance contract is: the subject or object of the insurance must be legal

For example, using an insured car for illegal purposes is usually not covered by insurance.

As a result, claims stemming from the insured's illegal acts are part of exclusions in the insurance contract.

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