Insurance Advisory Newsletter – ‘Exclusion’ under Insurance Policies : December 2024
What is an ‘Exclusion’ under insurance policies?
An exclusion, simply put, is the liability or risk which an insurance company would not cover. It is a settled principle that insurance contracts exclude: (i) intentional or deliberate acts or omissions which are known by the insured would result in risk exposure; (ii) violation of applicable laws; and (iii) non-disclosure of any prior or pending claims.
Certain examples of policy-specific exclusions are as follows:
- Errors & Omissions/ Professional Indemnity (“E&O/PI”) Insurance: Typically, this policy does not cover: (i) bodily injury or property damage (“BI/PD”); and (ii) liability arising out of service providers undertaking implied warranties of fitness for a particular purpose; and/or any assumed contractual liability.
- Cyber Insurance: This insurance usually excludes: (i) clients’ business interruption loss due to cybersecurity breach suffered by insured; and (ii) inadequate cybersecurity measures and policies.
Interpretation of exclusions under insurance contracts
Insurance is a regulated industry, and entities such as insurance providers and brokers engaged in this sector must comply with the Insurance Regulatory and Development Authority’s (“IRDA”) rules and directions. The IRDA is also tasked with approving the insurance products which are offered in the market as well as granting licenses to insurers and monitoring their compliance thereof in the interest of consumer protection.
The IRDA’s role is especially crucial considering that insurance policies are adhesion contracts, i.e., standard-form contracts, which have a very limited scope for negotiation by the person seeking to be covered. In the Supreme Court pronouncement of Texto Marketing Pvt. Ltd. v. Tata AIG General Insurance Co. Ltd., it was very categorically held that an insurer may avail the right to repudiate an insurance contract by relying on the terms and conditions thereunder, if and only if it has observed compliance with Clause 3 of IRDA Regulations, 2002 (“IRDA Regulations”).
Clause 3 of the IRDA Regulations requires insurers to undertake responsibility of transparently communicating the scope of coverage, responsibilities of an insured and exclusions under a contract of insurance. It is a trite law that an ambiguity under the terms of an insurance policy would have to be resolved in favour of the insured. This is referred to as the doctrine of contra proferentem. The Supreme Court has, in multiple judgements reiterated that burden of proving reliance upon an exclusion clause to repudiate claims is upon the insurer.
Key Takeaways
As discussed above, insurance providers must unambiguously communicate scope of coverage and exclusion of liabilities to the insured entity. Sufficient clarity regarding what is covered and not covered is quintessential to observing the principle of loss minimisation and setting-up adequate risk mitigation strategies while transacting business. Therefore, it is critical for an insured to vigilantly review exclusionary clauses under insurance policies, especially considering that these are standard-form contracts. Business procuring liability policies should have a precise and lucid idea in relation to:
i) the scope of coverages and the instances of liability which are not covered thereunder.
- Illustration: A business performing after sales services in respect of industrial equipment must negotiate a carve-back which dilutes the BI/PD exclusion, to include financial losses arising out of personal injury or property damage if there has been negligent performance of services.
- Illustration: An IT company, whose client-base has critical dependency on its services for their customer-facing transactions, must negotiate to avail a contingent business interruption extension.
ii) acts which could result in repudiation of claims; and
- Illustration: A manufacturing company having procured an ‘Industrial All Risk’ Policy, must ensure that its machinery is periodically monitored for damage. Insurance companies categorically exclude covering any liability which arises out of use of damaged/defective machinery.
- Illustration: A business engaged in software development must, in its customer contracts, ensure that there are sufficient warranty disclaimers in respect of implied warranties of merchantability and saleability. E&O insurance policies, as a principle, do not cover any liabilities which are contractually assumed by insured entities
iii) the claim notification process – An insured should have internal processes in place to comply with insurer’s requirements of notifying claims, adducing evidence and the timelines to be observed. For instance, in respect of employee Mediclaim Policies, entities must be aware of all the protocols which have to be followed for raising claims to the insurance provider for obtaining the necessary reimbursements.
For an insurance company intending to exclude its liability, it must demonstrate beyond reasonable doubt that there exists sufficient clarity and lack of ambiguity, in the insured’s understanding regarding its responsibilities as an indemnified party. An adjudicating authority may rule in favour of the insurance company if it is able to prove that the insured, having clear idea of its responsibilities did not make reasonable efforts to minimise the loss.
Therefore, business procuring insurance policies must be vigilant and adopt practices of thoroughly reviewing insurance conditions, exclusions and scope of risk covered, to maximise the utility of procuring insurance.
