Insurance Policy Exclusions: Unveiling the Epidemic of Under-Insurance Among Businesses

When was the last time you assessed your insurance policies? I recently examined the commercial policies in place for our company. If you undertake a similar review, you are likely to come across numerous phrases akin to the examples provided below.

This insurance policy excludes any form of loss, damage, cost, or expense, regardless of its nature, that is directly or indirectly caused by a range of circumstances of profound significance. These circumstances encompass but are not limited to acts of war, invasion, actions undertaken by foreign adversaries, hostilities, or warlike operations, irrespective of whether an official declaration of war has been made. Additionally, the policy does not provide coverage for events such as civil war, rebellion, revolution, insurrection, or civil commotion that escalates to the extent of an uprising, as well as instances involving military or illegitimate usurped power.

Moreover, this policy categorically excludes coverage for any act of terrorism, which entails the use of force, violence, or the imminent threat thereof, originating from an individual or a group of individuals acting independently or in affiliation with organizations or governments. Such acts, motivated by political, religious, ideological, or similar purposes, including endeavors to exert influence over any government entity and/or instill fear among the general public or specific segments thereof, fall outside the scope of this insurance policy.

Exclusions: Based upon, arising out of or resulting from a third party’s unauthorized access to an insured’s electronic or written documents, records or financial instruments.
The application of this Policy* is rendered inapplicable in the following instances: (a) in relation to any injury, sickness, disease, death, or destruction, wherein an insured party covered by this Policy is also a beneficiary under a nuclear energy liability policy provided by the Nuclear Energy Liability Insurance Association; or (b) in cases where the aforementioned harm arises as a consequence of the perilous attributes intrinsic to nuclear material.

Exclusions: Stemmed from the utilization or interaction with the designated Named Insured’s “Electronic Communications System” by governmental bodies, governmental agencies or subagencies, and their appointed representatives while functioning in an official capacity on behalf of said entities.

…due to losses resulting from riots, civil unrest, conflicts, revolts, or unlawful takeover.
…not cover any liabilities that the insured takes on as a result of a contract or agreement; however, any liabilities that the insured would have incurred regardless of such an arrangement shall not be excluded.
…excludes any claims made by or on behalf of any current, former, or prospective employee(s) related to employment or any workplace misconduct.
…excludes encompassed legal actions initiated by, under the name of, or on behalf of any individual who has held or currently holds a role as a principal, partner, officer, director, trustee, shareholder, or employee of the Named Insured. Nevertheless, it is essential to note that this exclusion shall not be applicable in situations where a Claim arises from instances of “Unauthorized Access” or “Potential Unauthorized Access” to the personal information of past or present principal(s), partner(s), officer(s), director(s), trustee(s), shareholder(s), or employee(s) of the Named Insured. It is imperative, however, that the aforementioned personal information remains under the care, custody, or control of the Named Insured for this exception to be valid.

The aforementioned examples represent merely a fraction of the exclusions present within our comprehensive commercial insurance policy. I intentionally omitted numerous verbose exclusions, some of which span nearly half a page in length. Undoubtedly, this extensive compilation of exclusions is truly staggering. Notably, our Commercial General Liability insurance policy categorizes exclusions from “A” to “S.” It is essential to acknowledge that our business primarily operates within an office environment and possesses a relatively straightforward structure. Just contemplate the breadth of policy exclusions that must exist for more intricate businesses with complex operational frameworks.

In addition to any pre-determined exclusions, commercial insurance providers may opt to discontinue coverage at any time. In order to ensure that all parties are adequately informed of the implications of the policy, the following excerpt is taken from our policy below. It is important to note that the insurer may choose to terminate coverage at any point and without prior notice, making it imperative for all parties involved to remain informed of their rights and obligations under the policy. Furthermore, it is essential that any concerns or questions pertaining to the policy are addressed in a timely manner in order to avoid any potential misunderstandings or disputes.

In the event of policy cancellation, we retain the right to terminate this insurance policy by issuing written notice to the first Named Insured via mail or personal delivery. However, it is imperative to note that we shall provide a notice of cancellation at least 120 days prior to the effective date of cancellation, unless the cancellation arises due to any other justifiable reason.

This exercise serves to illustrate the sheer number of exclusions contained in commercial insurance policies and how these exclusions can lead to significant gaps in coverage. Unfortunately, life is not always fair and there are many cases where a business owner has paid for insurance coverage for years only to discover that a particular loss is excluded from their policy. It is easy to believe that this will never happen to you and your business, but what if it does? The feeling of having invested so much money into insurance premiums over the years, only to be left with no safety net when you need it most, is a disheartening one. It is, therefore, essential to review the policy in its entirety in order to identify any potential liabilities and ensure that the coverage is sufficient for your particular needs. Moreover, it is important to remain aware of any changes to the policy and to make sure all questions and concerns are addressed in a timely manner. Ultimately, having an insurance policy that is tailored to your business and its needs can provide peace of mind and a sense of security that your business is well protected.

Rather than attempting to fill the numerous gaps in commercial insurance policies through expensive supplementary policies, many small and mid-size businesses can benefit from implementing a blend of third-party commercial insurance coverage and additional coverage provided by a captive insurance company owned by the business or its owners. Captive policies are more flexible than commercial policies, typically offering fewer exclusions and the ability to customize the terms to fill any gaps. Moreover, this approach avoids the costly trade-off of investing in commercial insurance without being able to reap the full benefits. These policies can also provide a number of additional advantages, such as increased cost savings, access to reinsurance markets, and enhanced asset protection. Ultimately, this approach can provide more comprehensive coverage for the business and its owners while also ensuring that the best use is made of available resources.

This is another reason that small and mid-size businesses are increasingly turning to small captive insurance companies in order to cover those gaps in commercial insurance policies. The good news is that Congress has provided favorable tax provisions for legitimate insurance companies, enabling them to establish reserves. Furthermore, captives provide an opportunity to access the reinsurance markets, allowing for greater protection against large losses. At the same time, the business can maintain greater control of its risk management program and gain access to a wider range of coverage options. In essence, small business owners can benefit from increased cost savings, enhanced asset protection, and improved risk management.

Due to favorable tax treatment granted to legitimate insurance companies, they have the ability to retain significant profits in cases where losses are minimal or do not occur. These funds can eventually be reinvested in the business. Moreover, insuring unrelated third parties through participation in risk distribution pools can contribute to reducing the business’ overall insurance costs. Additionally, these risk pools provide the business with the ability to diversify its risks, thereby improving its long-term prospects. By obtaining adequate insurance policies through its associated captive insurance company and risk pool, the business is able to secure a comprehensive coverage plan that is tailored to fill any commercial coverage gaps, providing it with the greatest chance of long-term survival.