Published on: 24 February 2021 by Michael Lamb
Insurance is a financial product designed to protect you from risks. Depending on the policy in question this could be a single risk, or many. The core idea of insurance is that the exchange of risk must be equitable, and a fee must be paid. This is to say that you will pay another entity to protect you from the financial damages associated with experiencing a risk.
In a perfect world, all risks, everywhere, all the time would be covered. However, our world is not perfect and under the concept of insurance an exchange of risk must be equitable for both parties – the party having the risk covered, and the party insuring the risk. Unfortunately, some risks are not actually “risks” – the risk may already be in existence, in which case it is a fact – and some risks are guaranteed to cause a loss no matter what protection is obtained or how much of a premium is paid.
To establish equity within insurance products, and to ensure that policies provide the coverage being advertised, insurers will apply exclusions to their insurance plans.
An exclusion is a clause placed on a policy that states the insurance will not apply if certain conditions are met or specific events happen. For example, a typical exclusion found on pretty much all insurance plans offered in Hong Kong is an exclusion in relation to: Acts of war or terrorism.
Any policy with an exclusion for Acts of War or Terrorism would not provide coverage upon a loss stemming from an act of war or a terrorist event.
If you held, for example, a home insurance policy and one day another country declared war and proceeded to drop bombs on your home, destroying it, your home insurance plan would not cover the rebuilding costs of the house as the cause of the loss was an act of war. As acts of war and terrorism were excluded from your policy, no claim will be upheld under the plan.
Exclusions enable insurance to function properly, and ensure that covered claims are paid.
Imagine you live somewhere like Louisiana, USA. A massive “once in a generation” storm is coming and the protective dykes preventing floodwater from reaching your home burst. People living in high-danger areas will often have exclusions against those dangers placed on their home insurance policies; floods in Louisiana, fire in Australia and California, typhoons in parts of the Philippines.
This is due to the simple fact that if an insurance company attempted to pay all the claims for a catastrophic event it would become insolvent – the company would fail and no claims, at all, would get paid. This doesn’t seem terribly equitable.
So, insurers will place exclusions on their policies to ensure that fundamental risks which influence all aspects of the protection the policyholder has purchased do not sway the equity of the policy, thereby maintaining an “insurance” offering.
At this point is important to note that there are relatively few general exclusions found on all insurance products all around the world. War and Terrorism is a good example of the exception to this rule. Each individual insurance company will apply its own exclusions to the type of coverage being purchased, and exclusions will vary between product classes; a car insurance plan may not be worried about flood damage, but will definitely exclude at-fault claims arising from accidents where alcohol or drugs were involved.
In some cases, and with specific classes of insurance, it may be possible to remove a limited number of exclusions from your policy. This is often referred to as “carving back” the exclusion. It is important to note that not all exclusions can be removed from a policy, and that the ability to remove an exclusion while offering coverage is entirely up to the discretion of the insurance companies.
The most forms of insurance where we most commonly see adjustments being made to exclusions are Health Insurance and Event or Contingency Insurance.
When it comes to health insurance the first time many people will encounter an exclusion is in relation to the issue of pre-existing medical conditions. A pre-existing medical condition is any condition which existed prior to the commencement of a health insurance policy, or of which the policyholder had sought treatment, taken medication, or was aware.
Generally, Pre-existing conditions are excluded from coverage under a health insurance plan. The reason for this goes back to the concept of equity under insurance – if health insurance is designed to protect you from the future potential costs of your healthcare, then covering an existing healthcare cost is not within the spirit of the protection.
However, depending on the condition being covered and the insurer holding the policy, it may be possible to carve back an exclusion on a pre-existing medical condition and have that condition covered by the health insurance policy. In order to accomplish this the policyholder usually needs to pay an additional premium, reflecting the risk associated with the condition on the insurance. As such, covering a pre-existing medical condition by increasing the premium is known as “coverage with a loading.” The premium has been “loaded” or increased to equitably cover the risks associated with the pre-existing condition.
The other way to avoid the issue of pre-existing medical condition exclusions on health insurance policies is to ensure that the medical history of the individuals being covered by the plan do not matter. This is known as obtaining a “Medical History Disregarded” benefit, and is normally only available to groups of 5 or more unrelated persons.
Unlike health insurance, most of the exclusions present on an event or contingency insurance policy can be removed, if you have enough budget or you buy additional covers. For example, inclement weather cancellation is commonly excluded on events which are held outdoors, unless the event organizer purchases inclement weather coverage in addition to the standard policy.
Event insurance is a useful comparison to health insurance, as the intent of contingency products is to protect you against widespread and unexpected situations which derail your plans. As such, event and contingency insurance products are inherently more flexible and more accommodating to policyholder needs that more rigid forms of coverage like Car, Home, or Health Insurance.
In fact, prior to Covid-19 you could have carved back the exclusion for communicable diseases on your event insurance policy, giving you protection from any losses you may have experienced from the pandemic canceling or postponing events under your control.
Exclusions come into play at every level of insurance. From purchasing a policy through to making a claim, it is important that you understand exactly how any exclusions apply to the coverage you hold. If you’re facing a difficult exclusion then it may not be a good idea to purchase the policy in question without first seeking advice. Remember, exclusions are in place for the benefit of both the insurer and policyholder to maintain the equity of the policy.
For more information about insurance, or insurance products in Hong Kong, please Contact Us today and speak with an expert insurance broker.