What business insurance doesn’t cover: common exclusions

Your general liability policy won’t pay when your own prep cook slices a finger, your property policy won’t pay when a river comes up into the stockroom, and none of your policies will pay to tear out and redo a tile job you installed badly. Those are exclusionsExclusionAn exclusion is a provision in an insurance policy that removes coverage for specific causes, types of loss, property or activities the policy would otherwise cover.Read the definition, the causes, kinds of damage and situations a policy says it won’t cover, and the table below sorts the common ones by which policy picks up the risk.

Most of them aren’t holes so much as hand-offs, because the risk belongs to a different policy, but a few are real gaps that you either fill with coverage bought on purpose or decide to carry yourself, and you want to know which is which before a claim tells you.

Most exclusions are hand-offs

Owners tend to read an exclusions list as a list of tricks, though most of it is plumbing. Exclusions do three jobs: they keep risks that can’t be insured out of every policy, like damage you cause on purpose or a roof that wears out over twenty years; they send risks to the policy built for them, so your general liability policy isn’t also trying to be workers’ comp; and they let an insurer price each policy for what it actually covers.

Still, you have to read them. Maine’s Bureau of Insurance tells business owners that all policies contain exclusions and other limitations of coverage, and that you should review your entire policy to find exposures that may not be covered, and the California Department of Insurance warns that a commercial general liability policy carries major exclusions you should read and understand.

Even a property policy sold as “all risk” doesn’t cover everything. Maine’s guide is blunt about it: contrary to its name, an all-risk or special form policy doesn’t cover losses that are specifically listed as exclusions. How to read a business insurance policy shows where exclusions sit in a policy and how definitions and endorsements change them.

The common exclusions, and what fills each gap

Coverage that Corgi doesn’t sell, like flood, earthquake, pollution, commercial auto and equipment breakdown, is available from other insurers. Every row is a general pattern, though, and the exact wording in your own policy is what counts.

Two rows send you to other pages. The employee row is the one Oregon’s small business insurance guide puts most simply, saying general liability excludes you and your employees, who are covered by workers’ compensation. States set the rules for who has to carry that coverage, and the federal Department of Labor’s list of state workers’ compensation agencies can help you check yours. Workers’ comp vs. general liability walks through who pays when someone gets hurt. The professional work row catches salons, designers and contractors, and general liability vs. professional liability explains where that line falls.

Water is where owners get caught

Slow down here, because water is where the most ordinary-looking losses turn out to be excluded. To a business owner, water damage is water damage, but to a property policy there are at least four different losses, and they can be treated in four different ways.

The first is sudden water from inside the building, like a supply line that bursts overnight and floods the stockroom, which is the kind of sudden, accidental loss property policies are generally built for, subject to their terms.

The second is rising water from outside, like a river that overtops its banks, a storm surge or heavy rain running across the parking lot and in under the door. That’s flood, and it’s usually excluded from commercial property policies, which is why flood coverage is sold separately, including through the National Flood Insurance Program. FEMA, which runs that program, says the NFIP provides flood insurance to property owners, renters and businesses, and that there is typically a 30-day waiting period before a new NFIP policy goes into effect. Buy it before storm season. Once a storm is in the forecast, it’s too late to help.

The third is the slow leak, the drip under a sink or around a window that rots a subfloor over months. Many policies exclude seepage that goes on for weeks, treating it as wear, deterioration or a maintenance problem, even though the water itself looks just like the water from a burst pipe and the damage can be just as expensive by the time anyone sees it.

The fourth is the easiest to miss: water that backs up through a floor drain or sewer line, or overflows a sump. Many property policies exclude it unless you add a water backup endorsement, so ask about it by name, especially if your space is below street level.

Then there’s the second exclusion water drags along.

That’s the reason to ask, when you buy, how your policy treats each of the four kinds of water, and to get the answer in writing before you need it, because after a loss the answer will come from the claims file instead.

Six businesses, six surprises

• Café. The walk-in cooler’s compressor dies of old age over a holiday weekend. The compressor failure is wear and tear, and the spoiled food may not be covered unless the policy includes spoilage coverage, though a kitchen fire is exactly the kind of loss property insurance is built for.
• Contractor. A tile job is installed badly and has to be torn out. Redoing your own work generally isn’t covered, but if the bad work lets water through and damages the client’s ceiling below, general liability may respond to that damage, subject to its terms.
• Office. A client says your financial projections were wrong and cost them an investor. General liability doesn’t cover a financial loss with no injury or damage, so this needs professional liability.
• Salon. A stylist burns a hand on a flat iron, which general liability excludes as an employee injury and workers’ comp covers. A client’s reaction to a chemical treatment may fall under general liability’s professional services exclusion, which is why salons usually carry professional liability.
• Auto shop. Hail dents eight customers’ cars overnight. General liability excludes property in your care, and garagekeepers with direct coverage is what typically responds when the shop did nothing wrong, since legal liability coverage pays only when the shop is at fault.
• Retail. A shop in a basement space finds the floor drain backing up after a storm. Without a water backup endorsement, the ruined stock may not be covered, however sudden the water was.

Can an exclusion be undone?

Sometimes, yes. Many exclusions carry their own exceptions, usually worded as “this exclusion does not apply to,” and those exceptions are where coverage quietly comes back. The contractual liability exclusion in a general liability policy is the common example: it generally excludes liability you take on in a contract, but it makes an exception for contracts the policy defines as insured contracts, which can include many lease indemnity clauses. Hold harmless and indemnification clauses explains how that works.

EndorsementsEndorsementAn endorsement is a written change to an insurance policy that adds, removes or modifies coverage, such as adding an additional insured or a new location.Read the definition can also add coverage back, narrow an exclusion or add a new one, and they’re the reason two policies with the same name can cover different things. Read the endorsements listed on your declarations pageDeclarations pageThe declarations page is the summary at the front of an insurance policy listing who’s insured, what’s covered, the limits, deductibles, premium and policy dates.Read the definition along with the exclusions, because an endorsement can change the meaning of everything above it.

Some exclusions can’t be bought back at any price, though. Intentional acts are the obvious one, because insuring deliberate harm runs against public policy, and insurers don’t offer it.

Finding gaps before a claim does

1. List what could go wrong. Think about people, property, income, your work, your data, your employees and any vehicles in your care.
2. Match each risk to a policy. If you can’t, that’s a gap to price or a risk to carry on purpose.
3. Read the exclusions and their exceptions in each policy, along with the definitions they depend on.
4. Check the endorsements. They can change everything above them.
5. Ask before you buy. At Corgi, coverage questions are answered by underwriters, not a broker.
6. Review at every renewal, and whenever you add a service, a location or a vehicle.

You won’t need a policy for every row of the table. A small office with no vehicles and no flood exposure can reasonably skip half of it, but it should skip those rows knowingly, with the decision written down, so that the first time anyone reads the flood exclusion isn’t the morning after the water comes in.