Study 6 - Anatomy of a Property Policy: Exclusions

Question 1

What is the purpose of exclusions?

Answer 1

• All property policies, whether named perils or all risks, contain exclusions that remove certain losses from the policy’s coverage.
• The exclusions list: types of property that are not insured, and perils that are never or sometimes not insured against.
• Exclusions never expand policy coverage but always restrict it.
• They remove: exposures to loss that are considered undesirable or uninsurable, exposures to trade risk or maintenance costs or other exposures to inevitable loss, and exposures that reflect underwriting and rating considerations.

Question 2

Define exception.

Answer 2

A case where a rule does not apply, in an exclusion under an insurance policy, an exception is a case where the exclusion does not apply. In the IBC all-risks forms, some of the exclusions that limit coverage are qualified by exceptions to those exclusions in the form of the Specified Perils listed later in the policy.

Question 3

What does Step 3 in reading a policy entail and how may it be extended?

Answer 3

Step 3 is to review the perils that are insured against, and the perils that are not.

You could extend Step 3 as follows:

1. Determine whether there is coverage under the policy by looking at what is insured under the policy and under what circumstances. The onus is on the insured to show that the loss or damage falls within coverage.
2. If there is coverage, next determine whether any exclusions apply to the circumstances of the loss or damage. The onus shifts to the insurer to demonstrate that the coverage is excluded.
3. If an exclusions applies, determine whether there is an exception to the exclusion that restores coverage despite the exclusion. The onus falls back to the insured to establish that an exception is triggered.

Question 4

Why are the perils excluded under the Comprehensive form also excluded under the Broad and Basic forms?

Answer 4

Because the property:

• does not fall under the named perils coverage of either form
• is specifically excluded within the description of the named peril
• falls within the exclusions listed in the form

Question 5

Explain the Buildings for Business or Farming exclusion.

Answer 5

Policy wordings for habitational risks must clearly not apply to business risks. Excluding buildings or structures used for business or farming helps ensure that insureds who present business exposures will be covered instead under commercial or farm policies more appropriate to those exposures.

Question 6

Explain the Property on Exhibit exclusion.

Answer 6

Property on exhibit faces unique exposures to loss not contemplated in the design of habitational forms. Generally these can be insured with an Exhibition floater.

Question 7

Explain the Property Illegally Acquired or Subject to Forfeiture Exclusion.

Answer 7

If an insured steals property or buys it from someone who stole it, the insured has no legal claim to indemnity for its loss. In order for the insurer to prove that the possession is illegal, the insured must first be convicted under the law.

Question 8

Explain the Evidence of Debt or Title exclusion.

Answer 8

The exclusion for evidence of debt or title denies coverage for property that may be insured by other forms specifically designed for it.

Question 9

Explain the Sporting Good exclusion.

Answer 9

Sporting equipment where the loss is due to use, is excluded. This exclusion is not found in the Basic or Broad Form because Coverage C is not insured for all risks.

Question 10

Explain the Animals, Birds, or Fish exclusion.

Answer 10

Animals, birds, or fish are excluded, unless the loss or damage is caused by a specified peril other than impact by aircraft or land vehicle.

Question 11

Explain the Property Lawfully Seized exclusion.

Answer 11

Excludes loss to property lawfully seized or confiscated, especially if the policy covers loss by theft. This exclusion supports public policy by denying coverage for property to which the insured has no legal claim. But coverage is restored is the property was seized and destroyed by government agencies to prevent the spread of fire.

Question 12

Explain the Outdoor Radio and TV Antennae, including Satellite Receivers exclusion.

Answer 12

Loss or damage to outdoor radio and tv antennae, including satellite receivers and their attachments, is not covered when cause by windstorm or hail, weight of ice, snow or sleet, or collapse.

Question 13

Explain the Scratching, Abrasion, Chipping or Breakage exclusion.

Answer 13

Loss or damage cause by scratching, abrasion, or chipping of personal property or breakage of fragile or brittle articles is excluded unless such loss is caused by:

• a specified peril,
• accident to a land vehicle, watercraft or aircraft
• theft or attempted theft

Question 14

Explain the Wear and Tear exclusion.

Answer 14

Excludes loss due to wear and tear, deterioration, defect, or mechanical breakdown.

Question 15

Explain the Faulty Material or Workmanship exclusion.

Answer 15

All-risks policies exclude resulting damage arising from faulty materials or workmanship

Question 16

Explain the Settling, Expansion, Contraction, Moving, Bulging, Buckling, or Cracking exclusion.

Answer 16

The Comprehensive and Broad forms exclude loss due to settling, expansion, contraction, moving, bulging, buckling, or cracking, except resulting damage to building glass. It’s suggested that this exclusion was only intended to exclude damages from gradual, naturally occurring events.

Question 17

Explain the Data or Data Problem exclusion.

Answer 17

Property policies exclude data (that could be compromised, misinterpreted, or misappropriated or deliberately or inadvertently deleted, added, or changed). This exclusion does not apply to loss or damage directly caused by resultant fire, explosion, smoke, or water damage as described in the Specified Perils.

Question 18

Explain the Vacancy exclusion.

Answer 18

The Homeowners forms exclude loss or damage if it occurs after the dwelling has, to the insured’s knowledge, been vacant for more then 30 consecutive days. The exclusion is triggered after 30 days or vacancy and applies for as long as the vacancy persists after that. The property may be unsupervised, vandalized or used by trespassers. Notification of any fires may be delayed.

Question 19

Explain the Nuclear Incident exclusion.

Answer 19

Both direct and indirect loss cause by nuclear incident are excluded, except for ensuing loss or damage which results directly from fire, lightning, or explosion of natural, coal or manufactured gas.

Question 20

Explain the Radioactive Contamination exclusion.

Answer 20

Excludes loss or damage caused by contamination by radioactive material.

Question 21

Explain the War Risks exclusion.

Answer 21

Loss or damage caused by war, invasion, act of a foreign enemy, hostilities, civil war, rebellion, revolution, insurrection, or military power is excluded. Under this exclusion, loss by fire and explosion or natural, coal, or manufactured gas is excluded if caused by one of the listed events. Generally, the events listed in this exclusion are considered uninsurable.

Question 22

Explain the Intentional or Criminal Acts exclusion.

Answer 22

Excludes loss from an intentional or criminal act by any person insured by the policy or any person at the direction of a person insured by the policy. Legislation has been passed in some provinces to protect innocent co-insureds.

Question 23

Explain the Property Being Worked On exclusion.

Answer 23

Excluded loss or damage to personal property while undergoing a process involving the application of heat.

Question 24

What are the four exceptions to the Water Damage exclusion?

Answer 24

1. The sudden and accidental escape of water from a watermain.
2. The sudden and accidental escape of water or steam from within a plumbing, heating, sprinkler, or air conditioning system, or domestic water container located inside the dwelling.
3. The sudden and accidental escape of water from a domestic water container located outside the dwelling (such damage is not covered when the escape of water is caused by freezing.)
4. Water that enters the dwelling through an opening created suddenly and accidentally by an insured Specified Peril other than Water Damage.

Question 25

Explain the first source of water damage.

Answer 25

The sudden and accidental escape of water or steam from a watermain. If the watermain or the connections from the main to individual premises or to street hydrants break, thousands of litres may be poured onto roads, driveways, and other areas very quickly.

Question 26

Explain the second source of water damage.

Answer 26

The sudden and accidental escape of water or steam from within a plumbing, heating, sprinkler, or air conditioning system, or domestic water container located inside the dwelling. Water may leak from plumbing systems if they are not maintained, air conditioners may back up and leak, steam may escape from a hot water heater or storage tank or heating system with such force that is expands over a large area, cools and becomes liquid. Sprinkler systems may either be the wet or dry type.

Question 27

Explain the third source of water damage.

Answer 27

The sudden and accidental escape of water from a domestic water container located outside the dwelling (such damage is not covered when the escape of water is caused by freezing.) Escape from a swimming pool is an obvious example of this source. The volume of water released needs to be significant to cause serious damage.

Question 28

Explain the fourth source of water damage.

Answer 28

Water that enters the dwelling through an opening created suddenly and accidentally by an insured Specified Peril other than Water Damage. But that entry of water nee not coincide with the creation of the opening (can happen within a reasonable timeframe)

Question 29

How is the Water Damage peril handled in the Homeowners forms?

Answer 29

The Basic Form includes the four sources of water damage under its Water Damage peril.
The Broad Form includes them under the Water Damage peril in Coverage C (personal property insured against named perils) and excludes water damage under the all-risks coverages A and B with the exception of the four sources of water.
The Comprehensive Form excludes water damage under it’s all-risks coverage with the exception of the four sources of water.

Question 30

What are the 9 water damage exclusions.

Answer 30

1. Freezing During Heating Season.
2. Continuous or Repeated Seepage or Leakage of Water
3. Escape from a Sewer, Sump, or Septic Tank
4. Ground Water
   5, Surface Water
5. Shoreline Ice Buildup and Water-Borne Ice
6. Watermains
7. Water System or Domestic Water Container
8. Building Under Construction or Vacant

Question 31

Explain the Freezing During Heating Season Water Damage exclusion.

Answer 31

Freezing is not covered for parts of the dwelling that are not heated during the normal heating season. Freezing is covered for each part of the dwelling that is heated during the heating season, unless all members of the insured’s household are absent for more than four consecutive days except:

• when the insured arranges for a competent person to enter the dwelling each day
• if the water supply has been shut off and all pipes and domestic water containers have been drained.

Question 32

Explain the Continuous or Repeated Seepage or Leakage of Water exclusion.

Answer 32

Repeated seepage or leakage implies deterioration or a failure to maintain the property. That suggest the ultimate damage is no fortuitous and so is not an insurable risk.

Question 33

Explain the Escape from a Sewer, Sump Pump, or Septic Tank Water Damage exclusion.

Answer 33

Water backing up or escaping from a sewer, sump, or septic tank is generally caused by plugged or otherwise dysfunctional drain or by a reverse flow from an external source beyond the dwelling’s plumbing and drainage systems. Some insurers may amend this exclusion to allow coverage of sewer backup perhaps to a specified amount with an additional premium charged,

Question 34

Explain the Ground Water Water Damage exclusion.

Answer 34

Ground water is most likely to cause damage in low-lying locations and in basements or underground installations.

Question 35

Explain the Surface Water Water Damage exclusion.

Answer 35

Water on the surface of the ground that follows no course or channel, does not gather into or form a natural body of water such as an ordinary watercourse, lake or pond is excluded. Exceptions are made for water escaping from a watermain or domestic water container (such as a swimming pool) outside of the insured’s dwelling.

Question 36

Explain the Shoreline Ice Buildup and Water-Borne Ice Water Damage exclusion.

Answer 36

Strong winds can blow water-borne ice that has broken free of large frozen areas onto the shore, where it may be pushed further ashore by other ice floes and destroy nearby structures.

Question 37

Explain the Watermains Water Damage exclusion.

Answer 37

Damage caused by water suddenly escaping from a watermain is covered, but damage to the watermain itself is not.

Question 38

Explain the Water System or Domestic Water Container Water Damage Exclusion.

Answer 38

Loss or damage to a system, which included plumbing, heating, sprinkler, or air conditioning systems, in addition to domestic water containers from which water has escaped is excluded. Such loss or damage to the system or container would likely be due to mechanical failure, wear and tear, deterioration, or corrosion.

Question 39

Explain the Building Under Construction or Vacant Water Damage exclusion.

Answer 39

Loss or Damage caused by the escape of water or steam is not covered if it occurs while the dwelling is under construction or vacant.

Question 40

Explain the Flood exclusion.

Answer 40

Flood exclusions in property policies commonly apply to, but are not limited to, waves, tidal waves, tsunamis, dam breaks, seiches, or the rising of, the breaking out of, or the overflow of any body of water or watercourse, whether natural or man-made.

Question 41

Explain the Pests exclusion.

Answer 41

Loss due to birds, vermin, raccoons, rodents, or insects is excluded except for loss to building glass.

Question 42

Explain the Smudging and Industrial Smoke exclusion.

Answer 42

Loss or damage cause by smoke from friendly fire is excluded. Examples of this is smudge pots used in agricultural operations and smoke from industrial operations.

Question 43

Explain the Earth Movement exclusion.

Answer 43

The exclusion in the Homeowners forms provides that loss or damage caused by snowslide, earthquake, landslid, or any other earth movement is not covered. The exception to this exclusion restores coverage if any of these perils result in fire or explosion, the resulting loss or damage is insured.

Question 44

Explain the Theft from Part of the Dwelling Rented to Others exception.

Answer 44

Loss or damage due to theft is excluded if part of the insured’s dwelling is rented to other partially or fully furnished and the tenant or a tenant’s employee or household member steals insured property from the rented portion.

Question 45

Explain the Vandalism or Malicious Acts or Glass Breakage While Dwelling Under Construction exclusion.

Answer 45

Loss or damage caused by vandalism or malicious acts or glass breakage occurring while the dwelling is under construction or vacant is excluded.

Question 46

Explain the Theft from a Dwelling Under Construction exclusion.

Answer 46

Loss or damage due to theft from a dwelling under construction is excluded for the same reason as vandalism/malicious acts. Such premises are often targets for vandals and thieves.

Question 47

Explain the Rust or Corrosion, Wet or Dry Rot, Fungi or Spores exclusion.

Answer 47

Loss or damage due to rust or corrosion, wet or dry rot, or fungi or spores is excluded. These events occur naturally but can be prevented or controlled by adequate maintenance.

Question 48

Explain the Fuel Oil exclusion.

Answer 48

Many insurers are unwilling to cover damage caused by heating oil leaking from residential oil tanks unless the tanks are relatively new. The causes of leaks occur inside the tanks, making meaningful inspection almost impossible. There is no firm benchmark for age of tanks that may leak.

Question 49

Explain the Trickery or Fraud exclusion.

Answer 49

Loss arising from trickery or fraud is excluded in all three of the Homeowner’s forms.

Question 50

Explain the Terrorism exclusion.

Answer 50

Personal property policies generally exclude loss or damage caused directly or indirectly, in whole or in part, by terrorism as defined or by any activity or decision of a government agency or other entity to prevent, respond to, or terminate terrorism. The insured is still covered for ensuing loss or damage that results directly from fire or explosion.

Question 51

What purpose do exclusions serve in a property policy?

Answer 51

They remove exposures to loss that are considered undesirable or uninsurable, exposures to trade risk or maintenance costs or other exposures to inevitable loss.

Question 52

What two types of exposure are typically listed in the exclusions?

Answer 52

They list the types of property that are not insured and perils that are never or sometimes not insured.

Question 53

What is the significance of an exception to an exclusion?

Answer 53

it qualifies or modifies what property or peril is actually excluded from coverage.

Question 54

What is step 3 of best practices in reading a property policy?

Answer 54

If there is an exclusion, determine whether there is an exception to the exclusion that restores coverage despite the exclusion.

Question 55

Why is it critical to understand not only the perils insured against under the policy but also the exclusions?

Answer 55

All risks coverage insures against loss or damage cause by a peril that is not excluded, therefore it is important to understand what is excluded.

Question 56

How may an understanding of exclusions extend Step 3 in reading a property policy?

Answer 56

In understanding that there may be exceptions to exclusions, you can interpret these exclusions properly.

Question 57

Which form provides the broadest coverage of the three Homeowners forms?

Answer 57

Homeowners Comprehensive (all risks minus exclusions)

Question 58

How does the extent of property and perils excluded under the Homeowners Comprehensive Form compare with the extent of exclusions under the Homeowners Broad and Basic forms?

Answer 58

Homeowners Comprehensive is all risk so it insures against all property and perils except for the exclusions. Since it is the broadest coverage, if a peril is excluded in the Comp form, it will also be excluded in Broad/Basic

Question 59

Where do the main differences lie in how corresponding exclusions are applied between the Basic, Broad, and Comprehensive forms?

Answer 59

The main differences in how corresponding exclusions are applied between the Basic, Broad, and Comprehensive forms lie in the progression in the three forms from named-perils to all risks coverage for Coverages A, B and C.

Question 60

Why are buildings for business or farming excluded under the homeowners forms?

Answer 60

Property policies are homogeneous and must be managed differently. Policy wordings for habitational risks must clearly not apply to business risks, excluding buildings that are business or farming ensure the policy is written correctly.

Question 61

Why is property illegally acquired or subject to forfeiture excluded under the Homeowners forms?

Answer 61

If the property is stolen, the insured has no legal claim to the indemnity of the loss. It is also against public policy to provide coverage for property that can be lawfully subject to forfeiture.

Question 62

Under what circumstances is coverage restored for property lawfully seized?

Answer 62

Coverage is restored if the property was seized and destroyed by government agencies to prevent the spread of fire.

Question 63

What makes hackers and viruses among the more serious problems for insurers posed by the growth of the Internet?

Answer 63

Hackers and viruses have the potential to cost a business or individual computer owner a lot of money either due to data being compromised or systems being breached.

Question 64

What is the effect of the exceptions to the exclusion of water damage in the Homeowners Comprehensive Form?

Answer 64

It ensures that the same four sources of water damage that are covered by the Broad and Basic forms are also exceptions to the exclusion of water damage for Homeowners Comprehensive.

Question 65

What do the Homeowners forms exclude in respect of terrorism?

Answer 65

It excludes loss or damage cause directly or indirectly by terrorism as defined or by any activity or decision of a government agency or other entity to prevent, respond to, or terminate terrorism.