UPDATED: Mar 13, 2020
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An exclusion, in insurance terms, is a specifically defined event or circumstance or series of events and circumstances under which your insurer will not pay benefits or pay a reduced level of benefit depending on your coverage.
This is because when your insurer sets the premiums for your policy, it may be unprepared to cover some levels of risk – for example, personal injury if you are driving whilst under the influence of alcohol and/or prescription or illegal drugs. In this case, this is because the behavior itself is both illegal and foolishly risky on the part of the insured party.
In other cases it may that an exclusion is made if it can be demonstrated that you were not in compliance with specific terms of your insurance policy, for example, if you have an anti-theft recovery system discount on your policy but the anti-theft protection was not paid up to date making recovery impossible the insurer may have a clause that prevents you from making a claim for loss in the event of theft.
For the case of health insurance it is very common for policies to have exclusions which relate to pre-existing conditions this is because from the insurer’s perspective there is an unacceptably high chance of treatment being required for the condition, it is important to list all the pre-existing conditions you have on your health insurance paperwork if your insurer asks you to do so as withholding information can result in the entire policy being ineffective or nullified.
Some auto insurance policies also have exclusion clauses for other drivers, for example, your policy may allow other drivers to use your vehicle and allow for the same level of coverage as you would receive. However, it is common in these instances for insurers to exclude individuals living in the same house as you do, unless they are specifically named on the insurance policy. This is because the people who share your roof are much more likely to use your car on a regular basis and as such the insurer wants to be able to take into account the level of risk they represent as well as the level of risk you represent.
Of course this means that premiums for other customers are fair, otherwise, young drivers who live at home would simply have their parents insure their cars and drive the vehicles at a much lower rate than was appropriate for their level of risk.