Understanding Property Insurance Exclusions: What’s Not Covered and Why It Matters

When people buy property insurance — whether for a home, rental unit, or commercial building — they often assume it covers everything. After all, that’s what insurance is for, right?

Unfortunately, that's a dangerous assumption.

Every property insurance policy contains a section known as “exclusions” — specific situations, events, or types of damage that the insurer will not cover. These exclusions can cost you thousands — even hundreds of thousands — if you’re not aware of them.

In this comprehensive guide, we’ll explore:

• What property insurance exclusions are
• Why they exist
• The most common exclusions across home, rental, and commercial policies
• How to spot hidden gaps in your coverage
• What you can do to protect yourself from excluded risks

Whether you’re a homeowner, landlord, or business owner, understanding property insurance exclusions is just as important as knowing what is covered.

What Are Property Insurance Exclusions?

Exclusions are limitations in an insurance policy. They define what the insurance company will not pay for, even if damage occurs to your insured property.

These exclusions are legally binding and are clearly outlined in your policy document — typically under sections titled:

• “Exclusions”
• “What is not covered”
• “Limitations and Conditions”

In simple terms, exclusions set the boundaries of your protection. Anything outside those boundaries is your responsibility — unless you purchase additional coverage (called an endorsement or rider).

Why Do Insurers Include Exclusions?

Insurance companies operate based on risk calculations. Exclusions exist for a few key reasons:

1. Unpredictable or high-risk events
   Some events (like war or nuclear accidents) are uninsurable due to the extreme risk.

2. Maintenance-related issues
   Insurance is meant for sudden, accidental damage — not for wear and tear or neglect.

3. Specialized risks
   Some perils (like floods or earthquakes) require separate policies, often from government-backed programs.

4. Cost control
   Including every possible risk would make premiums unaffordable for most people.

5. Moral hazard
   Exclusions prevent abuse, such as people intentionally causing damage to collect a payout.

Common Property Insurance Exclusions (Homeowners & Commercial)

Let’s dive into the most frequently excluded events in property insurance policies:

1. Flood Damage

One of the most misunderstood exclusions.

• What’s excluded: Water damage from natural floods, overflowing rivers, storm surge, or heavy rain entering the property from outside.
• What is covered: Water damage from internal sources (like burst pipes or broken water heaters) is usually covered.

Solution: Buy a separate flood insurance policy — often available through the National Flood Insurance Program (NFIP) or private insurers.

2. Earthquakes and Ground Movement

Damage from earthquakes, sinkholes, landslides, and ground shifting is almost always excluded.

• Applies to: Homes, rental properties, and commercial buildings
• Why it matters: Earthquakes can destroy entire structures, especially in high-risk areas like California, Alaska, or Japan.

Solution: Purchase earthquake insurance as a rider or stand-alone policy.

3. Wear and Tear / Gradual Deterioration

Insurance is not a maintenance contract.

• What’s excluded:
• Rust and corrosion
• Rotting wood
• Mold (in many cases)
• Faded paint or worn flooring
• Roof leaks due to aging materials

4. Negligence and Poor Maintenance

If your failure to maintain the property leads to damage, your claim may be denied.

Examples:

• Ignoring a leaky pipe that causes mold
• Failing to replace faulty wiring that sparks a fire
• Not fixing a roof that collapses under snow weight

Lesson: The insurer expects you to act like a responsible property owner. If you’re careless, they won’t pay.

5. Pest Infestations

Damage caused by:

• Termites
• Rodents
• Birds
• Insects

is almost never covered.

Why? These issues are considered preventable with regular inspections and extermination.

6. Acts of War or Nuclear Hazards

Virtually all property insurance policies exclude:

• War (declared or undeclared)
• Terrorist attacks (sometimes excluded, sometimes not)
• Nuclear accidents or fallout

Reason: The scale of destruction would bankrupt insurers.

7. Government Seizure or Confiscation

If your property is:

• Condemned
• Taken for eminent domain
• Seized during criminal investigations

8. Intentional Damage

If you or someone in your household intentionally damages your property, the insurer won’t pay.

Example: Setting your home on fire to collect insurance is insurance fraud — and a crime.

9. Business Use of Residential Property

Using your home for business purposes (without telling your insurer) may invalidate your coverage.

• Example: Storing business inventory in your garage that catches fire
• Solution: Get a home business endorsement or separate commercial policy

10. Vacant or Unoccupied Properties

If your property sits vacant for more than 30–60 days (depending on the policy), you may lose coverage for:

• Theft
• Vandalism
• Water damage
• Fire

Why? Empty buildings are higher risk.

Solution: Get a vacant property endorsement if your home will be unoccupied.

11. Building Code Upgrades

Insurance typically pays to restore your home to pre-loss condition — not to current code standards.

• If your city requires you to upgrade wiring, plumbing, or insulation during repairs, you might have to pay the difference.

Solution: Add ordinance or law coverage to your policy.

12. Loss of Value / Market Depreciation

Even if your property is damaged and then fully repaired, the loss in resale value is not covered.

Insurance doesn’t compensate for diminished property value — only physical damage.

Hidden Exclusions You Might Overlook

Some exclusions are buried in the fine print or triggered by how the damage occurs.

“Anti-concurrent causation” clauses

If two causes of damage occur simultaneously (e.g., flood + windstorm), and one is excluded, the entire claim might be denied.

Equipment breakdown

A power surge fries your HVAC system. Is it covered? Not unless you have equipment breakdown coverage.

Sewer backup

A backed-up drain floods your basement — not covered unless you buy sewer backup insurance.

How to Read the Exclusions Section of Your Policy

Don’t rely on assumptions — read your actual policy! Look for:

• “Named perils” vs. “All-risk” policies
• Exclusions section (usually in the middle of the policy)
• Endorsements (added protections)
• Definitions of key terms (e.g., “flood,” “earth movement”)

Tip: If a risk isn’t listed in the covered perils, assume it’s excluded.

How to Protect Yourself from Exclusions

You can’t eliminate all exclusions — but you can prepare for them with these steps:

1. Ask your agent about common exclusions

Bring up specific scenarios like mold, floods, or sewer backup.

2. Purchase endorsements or riders

Many exclusions can be removed by adding optional coverage.

Examples:

• Flood insurance

• Earthquake coverage

• Sewer/drain backup coverage

• Equipment breakdown

• Ordinance or law coverage

• Business-use endorsement

3. Keep your property in good condition

Preventive maintenance reduces risks of denied claims.

4. Document everything

Keep records of inspections, repairs, and renovations — these can help prove that damage wasn’t caused by neglect.

5. Consider umbrella coverage

This adds extra liability protection if your policy limits are exceeded (though it doesn’t usually remove exclusions).

Common Misconceptions About Exclusions

Real-Life Example: A Costly Exclusion

Case: A homeowner’s basement floods due to a backed-up sewer during a storm.

• Damage: $30,000 to flooring, furniture, and walls
• Insurance response: Denied — sewer backup excluded
• Homeowner: Didn’t know about sewer backup riders

Lesson: A simple, $150/year rider could’ve saved $30K in losses.

Final Thoughts: Don't Let Exclusions Catch You Off Guard

Property insurance is powerful — but only if you know its limits.

Too many property owners realize too late that:

• Floods aren’t covered
• Mold damage is excluded
• Vacant homes are at risk
• Sewer backups require extra coverage

Don’t let exclusions ruin your financial safety net. Take time to:

• Read your policy
• Ask questions
• Customize your coverage
• Review it yearly

In the world of insurance, what you don’t know really can hurt you. Knowledge is your best protection — and it starts with understanding what isn’t covered.