Commercial property exclusions: what the standard policy won't pay

A commercial property policy written on the ISO special causes-of-loss form, CP 10 30, covers direct physical loss to covered property from any cause that is not excluded or limited. The exclusions, then, define the policy. Most of them take out risks that insurers price separately (flood, earthquake, utility failure, code upgrades) or that are not insurable losses at all (wear and tear, faulty maintenance). Knowing which exclusion applies, and which tier of the form it sits in, tells you whether a claim is coverable and which endorsement or separate policy fills the gap.

How the exclusions are built

The special form groups its exclusions in three tiers, and the tier changes how a court reads them. (This description follows the ISO form; carrier forms, other editions and manuscript policies vary in wording and order.)

1. Tier one: excluded however the loss arises. These exclusions begin with a lead-in saying the loss is excluded regardless of any other cause or event that contributes concurrently or in any sequence. If an excluded cause is part of the chain, the whole loss falls out. This is the anti-concurrent causation clauses: when one excluded cause sinks a claim language that drives most coverage litigation after hurricanes, floods and earthquakes.
2. Tier two: excluded when caused by or resulting from the listed cause. These do not carry the lead-in. Several carry exceptions that give back a resulting covered loss, such as fire following an electrical or steam event, or loss from a "specified cause of loss" that follows wear and tear.
3. Tier three: excluded causes with an ensuing-loss exception. Weather conditions that combine with a tier-one cause, acts or decisions of a person or body, and faulty planning, design, workmanship, repair or maintenance are excluded, but if one leads to a covered cause of loss, the resulting loss is covered.

Generally, the insurer carries the burden of proving that an exclusion applies, and the insured carries the burden of showing an exception to it, although the rule varies by state. Read the exceptions as carefully as the exclusions. The basic, broad and special causes of loss forms: what each covers guide compares the basic, broad and special forms.

The large exclusions and where each gap is filled

Terrorism is a separate matter handled under federal law; see Terrorism insurance and TRIA: how the federal backstop works. Virus and bacteria losses are excluded by an ISO endorsement, CP 01 40, which many carriers attach to policies, and it was the center of the pandemic litigation summarized in What the COVID-19 business interruption lawsuits decided. Carriers have also begun attaching cyber incident exclusions to property forms, so check the endorsement schedule.

The exclusions that fail ordinary claims

Few owners lose a claim to the nuclear exclusion. These everyday exclusions are where adjusters actually deny or reduce payment.

• Wear and tear, rust, corrosion, decay, deterioration, latent defect. The loss from age or an internal quality in the property that makes it damage itself. If the deterioration then causes a "specified cause of loss", such as a fire or a sudden water discharge, the resulting damage can be covered.
• Continuous or repeated seepage or leakage of water over 14 days or more. A slow leak behind a wall or under a slab is excluded; a pipe that bursts suddenly is not. Documentation of when the leak started matters.
• Freezing of plumbing, heating or air-conditioning equipment. Excluded unless you did your best to maintain heat in the building or drained the equipment and shut off the supply. Empty buildings are a common victim; see vacant building insurance and the vacancy clause.
• Mechanical breakdown and artificially generated electrical energy. A failed compressor or an electrical surge that burns out equipment. These are the reason equipment breakdown insurance: what it covers that property insurance does not exists.
• Changes in or extremes of temperature, and dampness or dryness of atmosphere, to personal property. The spoilage exclusion; see spoilage coverage for refrigeration breakdown and power outage.
• Faulty workmanship, design, materials or maintenance. The contractor's error that causes the loss is excluded, though a resulting covered loss, such as a fire, is paid. This exclusion surfaces in construction and roof disputes.
• Settling, cracking, shrinking or expansion; nesting or infestation by animals.
• Rain, snow, sleet or ice to personal property in the open, and rain entering the interior of a building unless the building's roof or walls are first damaged by a covered cause.
• Dishonest or criminal acts by you, your employees or people you entrust the property to, and voluntary parting with property if induced by a fraudulent scheme. Employee theft and invoice or payment fraud sit under crime coverage; see commercial crime insurance: what it covers and what it excludes.
• Delay, loss of use or loss of market. The property policy pays for physical damage, not for consequential loss, unless business income coverage applies.
• Neglect. The insured's failure to use reasonable means to save and preserve property from further damage at and after a loss. Board up the opening and stop the water.
• Pollutants. Discharge or release is excluded unless caused by a specified cause of loss, and cleanup costs for pollutants are limited.

A hypothetical example

Say a restaurant discovers a damp wall and, behind it, a corroded supply line that has been weeping for months. The claim has three parts. The slow leak falls under the 14-day seepage exclusion. The corroded pipe is wear and tear. The mold that grew in the wall cavity falls under the fungus exclusion, with only the limited additional coverage. If the same pipe had burst suddenly, flooding the kitchen, the sudden discharge would likely be covered as water damage, even though the pipe itself, being worn, would not be paid. The adjuster's question is not "did we have a leak" but "when, how fast, and what caused it."

Property that is not covered, and limits that cap what is

The coverage form, CP 00 10, has its own list of property not covered. The entries that surprise owners:

• Money, notes and securities (crime coverage handles them) and accounts or bills.
• Land, water, growing crops and lawns.
• Foundations below the lowest basement floor or below the ground surface, and the cost of excavation, grading and backfilling.
• Paved surfaces, such as roadways, walks and patios; underground pipes, flues and drains; retaining walls that are not part of the building.
• Vehicles and self-propelled machines licensed for public roads or operated principally away from the premises, unless you hold them for sale or manufacture them.
• Electronic data, except under the limited additional coverage.
• Outdoor fences, antennas, signs not attached to the building and trees, shrubs and plants, apart from limited coverage extensions; see signs, glass and outdoor property: what commercial property covers.

The special form also caps some property by dollar amount. The ISO form limits furs, jewelry, precious metals and patterns, dies and molds to small amounts per occurrence, a far lower number than a jewelry store's stock. Owners of high-value stock, such as jewelry stores, need a jewelers block or a scheduled inland marine policy; see inland marine insurance for tools, equipment and goods in transit.

How an adjuster works through a loss

1. Establish the direct physical loss and the property affected.
2. Identify the cause and the sequence of events.
3. Check each tier of exclusions against the cause, starting with tier one.
4. Look for exceptions and ensuing-loss language that give back coverage.
5. Check limitations, sublimits and additional coverages.
6. Apply endorsements, which can add or remove coverage.
7. Apply the deductible, coinsurance and valuation provisions.

Reviewing your own policy

• Ask your broker for the list of every endorsement attached and read the exclusion endorsements first.
• Mark which of the large exclusions apply to your location: flood zone, seismic zone, aging plumbing, power reliability.
• Decide which gaps to buy back and which to accept, and write that decision down.
• Check whether the policy is in the special form, the broad form or the basic form; a named-perils policy has far fewer covered causes.
• Revisit this at each renewal and whenever the building or operations change. The how to read a commercial policy: declarations, forms and endorsements guide walks through a policy in order.

Key takeaways

• The ISO special form is an open-perils form: it covers direct physical loss unless excluded, so exclusions and limitations define the policy.
• Tier-one exclusions apply regardless of any concurrent cause, which is why a storm can lose the entire loss to the water exclusion.
• The exclusions behind everyday denials are wear and tear, slow leaks, freezing, faulty maintenance and mechanical breakdown.
• Each large exclusion has a specific endorsement or policy that buys the coverage back.
• Read the endorsement schedule, because virus, cyber and other exclusions are added by endorsement.