What is an "exclusion" in an insurance policy?

An exclusion in an insurance policy refers to a specific condition or circumstance that the policy explicitly does not cover. Understanding exclusions is crucial for policyholders because they outline the limits of what the insurance will pay for in the event of a claim. They help insurers manage risk by clearly defining the situations in which coverage will not be provided. This clarity allows both the insurer and the insured to have a mutual understanding of what is excluded from coverage, leading to fewer disputes when a claim arises.

For instance, many health insurance policies may exclude coverage for pre-existing conditions, while a homeowner's insurance policy may exclude damage from earthquakes. Recognizing these exclusions is essential for insured individuals to know what risks they still need to manage independently.