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Exclusions in insurance: Here's how they can affect your coverage

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Telling an adult to read their insurance policy from cover to cover is like telling a child to be careful when going outside to play. You’ll get a head nod, but the adult still won’t read the policy, and the child will still climb the tree.

Why is it important to read a sample insurance policy when you’re applying for a policy? It’s wise to know what your policy will cover, but it’s also wise to know what it won’t cover. Two of the essential words you’re looking for in your policy are “exclusions” and “limitations.”

In this article, we’ll look at both in-depth. We’ll see not only what they mean but what to do if your policy comes back with exclusions and limitations that you disagree with.

What are exclusions in insurance?

An exclusion is a condition or event that the insurance company doesn’t cover and won’t pay claims.

For example, most homeowners insurance policies have an exclusion for loss due to floods. They’ll pay claims for damage from hurricanes or damage from lightning strikes, but not floods. If you want to have flood insurance, you have to buy a policy that specifically covers that peril.

A good example of an exclusion you would find in a disability insurance or health insurance policy is an exclusion for a pre-existing condition, like a herniated disc in your back. Your back would be excluded because you’re a much greater risk to an insurance company, what underwriters call “a claim waiting to happen.”

Insurance companies are like any other for-profit business — they need to take in more money than they pay out. If you apply for a disability policy with that bad back, you’re a good candidate to cause the insurer to pay a big claim (also called a “shock claim”) for back surgery, which is why they would exclude your back or any conditions related to your back.

Excluding pre-existing conditions is not only done to protect the insurance company’s bottom line, but also to keep rates reasonable for their policyholders.

When insurers set their premiums, their actuaries calculate the likelihood of claims and how those claims will affect the bottom line. They know, for example, that if they plan for 1000 claims per year, they can charge $100 per month for one of their policies and earn a certain amount of profit.

But, what if their projections were wrong and in the first year they paid 2,000 claims? That would result in the rates for those same policies being higher for new policyholders and, depending upon the type of insurance, may be higher for existing policyholders.

Have you ever had your rate increased for your health insurance policy? Your auto insurance policy? If so, the insurer probably paid out more money in claims than they had planned.

It also occasionally happens in reverse. During the height of the COVID-19 pandemic, some auto insurers temporarily reduced their rates because people weren’t driving nearly as many miles as they usually did, resulting in fewer claims paid. They shared those savings with their policyholders by lowering the rates.

[ Related: How has COVID-19 impacted the insurance industry? ]

What are some common disability insurance exclusions?

Not all insurance companies that sell long-term disability insurance have the same exclusions, but these are four exclusions you’ll find in almost all disability policies.

Pre-existing conditions

Disabilities caused by a condition treated in the 90 days before the date the policy was issued. For example, if your doctor had directed you to take ibuprofen for your bad back when you saw her two weeks before your policy was issued, any claim you submitted related to your back would be denied.

[ Related: Disability insurance & pre-existing conditions, explained ]

Mental or nervous disorders

Specific conditions, such as depression, anxiety, bipolar disorder, panic disorder, or post-traumatic stress disorder (PTSD) are either excluded or have a benefit limitation (explained below).

[ Related: Mental health & disability insurance in the age of COVID-19 ]

Self-reported symptoms and conditions

“Self-reported conditions” are disabilities caused by symptoms such as pain, fatigue, or cognitive dysfunction (brain fog).

For example, you may have reported being “tired all of the time” to your doctor, which was recorded in your medical records and later used as grounds for claim denial by the insurer.

Alcoholism and drug addiction or abuse

Some insurers have been known to deny claims by establishing that an insured’s disability resulted from alcoholism or drug addiction.

Other exclusions you’ll often find incorporated into a disability policy include:

  • War or acts of war and/or riots
  • Suicide attempts
  • Normal pregnancy
  • On-the-job injuries
  • Intentional acts causing disability
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What are limitations in insurance?

A limitation in an insurance policy is typically the amount of time or money that an insurance company will pay claims related to a specific disability.

An example of this would be a limitation on mental or nervous disorders. While some insurers exclude these disorders, many others will put a two-year time limit on the payment of benefits.

You’ll also find limitations on alcoholism and drug addiction or abuse. Two years is a typical limitation period for these illnesses, but will vary by insurer.

Many policies don’t cover disabilities caused by substance abuse or alcoholism. For example, an alcoholic who falls down the stairs at home while intoxicated and can’t perform their job duties due to the fall probably won’t have a long-term disability claim paid by their insurer.

Tangentially related, some Accidental Death and Dismemberment (AD&D) policies will deny the payment of benefits if the injury or death is a result of alcohol or substance abuse.

Can exclusions & limitations be removed from a policy?

It doesn’t happen very often, but it does happen.

Let’s say that the paramed exam you had when you applied for a disability or health insurance policy revealed that your blood pressure was high the day of the exam, and you received a policy that excluded anything related to high blood pressure, heart attack, or stroke. You could contest that by providing the insurer with three readings taken at different times by your personal doctor that showed your blood pressure being in the normal range. As a result, some insurers would remove the exclusion from your policy.

The bottom line — read your policy very carefully when you get it and have it reviewed by a trusted advisor if you don’t understand or agree with an exclusion or limitation. It’s much better to know what’s not going to be paid before you submit the claim, not after.


Having grown up in upstate New York, Bob Phillips spent over 15 years in the financial services world and has been making freelance writing contributions to blogs and websites since 2007. He resides in North Texas with his wife and Doberman puppy.

The information and content provided herein is for educational purposes only, and should not be considered legal, tax, investment, or financial advice, recommendation, or endorsement. Breeze does not guarantee the accuracy, completeness, reliability or usefulness of any testimonials, opinions, advice, product or service offers, or other information provided here by third parties. Individuals are encouraged to seek advice from their own tax or legal counsel.

Insurance
Published November 11, 2021