Exclusions play a significant role in defining the boundaries of your insurance coverage as they outline what is not covered by your policy. Carriers may exclude coverage for specific exposures for multiple reasons. Some risks may be too large or too costly to insure, such as terrorist attacks or earthquakes, while other excluded risks may encompass issues that are considered the property owner’s responsibility. Wear-and-tear damage or mold issues are almost always excluded, as these risks are characterized by general maintenance problems or conditions that develop over time and can usually be prevented with proper upkeep. Keep in mind insurance is designed to cover sudden and accidental damage, not gradual deterioration or preventable issues.
Knowing what exclusions are typical for property policies can help highlight the risks you retain as the property owner and ensure you do not mistakenly expect coverage for incidents that your policy specifically omits. Some exclusions, though not all, can be bought back by endorsement or a separate policy.
It’s also important to note that standard homeowners policies often exclude coverage for losses related to running a business from the home, including rental activities. Investors must have a policy designed specifically for investment properties to ensure proper protection.
What are typical exclusions in an insurance policy?
Wear-and-Tear
A normal amount of wear and tear is to be expected from the ordinary course of living. As an investor, you should be fully prepared to pay for carpet cleaning services and a fresh coat of paint between renters. Wear-and-tear damage and deterioration are industry-wide exclusions in property policies of any form. The cost of these small “repairs” can be taken care of through the security deposit or accepted as the cost of operating your business (tax-deductible).
Intentional Tenant Damage
Many investors assume that any kind of damage done by a tenant will be covered by their property insurance policy. Intentional tenant damage is usually a sudden, one-time event and may include damage such as broken doors, missing appliances, spray-painted walls, etc. Damage done by tenants is typically excluded and not considered vandalism or theft to most carriers as you have a written contract (the lease) entrusting the tenant with the care of your property. That contract should stipulate the penalties for any misuse of the property, whether that be withholding the security deposit or filing a civil lawsuit.
Mold & Fungus
Standing water from floods, sewer backup, or other water-related incidents can cause mold issues if not caught within 24-48 hours of the initial damage. Insurance coverage for mold, mildew, and fungus is typically completely excluded or very limited. As insurers differ, policy language may mention “mold,” “organic pathogens,” “mycotoxins,” or “penicillium.” Some policies may also include wet and dry rot and bacteria as an exclusion. Some courts of law treat mold as a pollutant. As such, mold may not be covered if the policy has an absolute pollution exclusion. Mold and fungi may damage Sheetrock, insulation, and possibly framing. They may also affect your tenants’ health, including respiratory issues or allergies.
Sewer & Drain Backup
Tree-root blockages or sanitary main clogs may cause sewage or water to come up into homes through floor drains in showers, toilets, or sinks. This water backup or overflow from a sewer, drain, or sump is typically excluded from standard property policies. Sewer & Drain Backup coverage is included as part of NREIG’s Tenant Protector Plan and covers damage to the property caused by a clogged sewer line, failed sump pump, or backed-up drain that forces water into the home.
Natural Disasters
Earthquakes & Sinkholes
The unpredictable and catastrophic nature of earthquakes and sinkholes leads most carriers to exclude coverage from standard policies. However, separate coverage can often be purchased as an endorsement of existing policies. NREIG offers Earth Movement as a supplemental policy, extending coverage to damage caused by a sudden and violent shaking of the ground resulting from the movement of the Earth’s crust and sinkholes.
Flood
Flood damage may occur when water from natural sources, such as rivers and lakes, breaches banks during heavy rains or when the ground is over-saturated with water and causes the excess to seep through foundations or other vulnerable parts of the structure. It’s important to know that to be considered a Flood loss, the water must come from an external source, not from within your plumbing or sewer system. Most property policies exclude coverage for flood, surface water, waves, tides, tidal waves, and overflow of any body of water or their spray, whether driven by wind or not. With most insurers, Flood coverage can be purchased as a separate policy. NREIG offers Flood insurance through the NFIP and private insurers.
Faulty Workmanship
Most insurance policies exclude coverage for property damage resulting from faulty structural works, such as deck support failure or other construction defects. Even if a renovation property is properly insured under a Builders Risk policy, carriers typically exclude Faulty Workmanship to prevent overlapping coverage. Instead, any damage or negligence caused by a contractor’s workmanship should be covered under their own insurance policy.
This blog post is for informational purposes only and does not reflect the specific coverage terms of any particular policy offered by NREIG. These exclusions represent common limitations found in standard dwelling policies for real estate investment properties. Always review your insurance documents and speak with your Client Service Advisor to understand the exact exclusions that apply to your property.
