COVARAGE - SME Insurance Compliance Across Southeast Asia

When purchasing business insurance, what's not covered can be just as important as what is. Insurance policies contain exclusions—specific situations, perils, or types of damage that aren't covered—and understanding these gaps is crucial for protecting your business. This guide explores the 12 most common exclusions in business insurance policies that every SME owner in Southeast Asia should be aware of.

Important: This article provides general information about common exclusions. Always review your specific policy wording and consult with your broker or insurer to understand exactly what is and isn't covered for your business.

1. Wear and Tear / Maintenance Issues

Almost all business insurance policies exclude damage resulting from:

Normal wear and tear over time
Gradual deterioration of property or equipment
Lack of proper maintenance

Insurers expect business owners to keep up with regular maintenance and repairs. For example, if your roof leaks because it's old and hasn't been maintained, the resulting water damage likely won't be covered. As noted by Commercial Real Estate Loans, "Insurance is designed to cover sudden, accidental damage—not damage that occurs gradually over time due to neglect."^[1]

2. Intentional or Criminal Acts

Insurance policies exclude losses resulting from:

Intentional damage caused by the business owner or employees
Criminal activities or fraud
Deliberate violation of laws or regulations

As Thimble explains, "If you intentionally cause harm or damage, your insurer won't cover the resulting claims."^[2]Similarly, Red Asia Insurance notes that "acts of dishonesty, fraud, or criminal acts by the insured" are standard exclusions.^[4]

3. Catastrophic Events

Many standard business policies exclude large-scale catastrophic risks that could affect many policyholders simultaneously:

War and terrorism - Damage from acts of war, terrorism, or civil unrest
Nuclear hazards - Losses related to nuclear reactions, radiation, or contamination
Large-scale natural disasters - Events like earthquakes, floods, or tsunamis often require separate specialized coverage

According to Bionic, "Most business insurance policies won't cover you for damage caused by acts of terrorism, war, or nuclear risks."^[6]These exclusions are particularly important to consider in regions prone to specific natural disasters.

4. Pollution and Environmental Damage

Standard business policies typically exclude:

Pollution-related claims, whether sudden or gradual
Environmental contamination
Cleanup costs for hazardous materials

Zensurance points out that "most standard policies exclude pollution or contamination-related claims unless specifically added as an endorsement."^[5]Businesses in industries with environmental exposure risks should consider specialized environmental liability coverage.

5. Neglect

Closely related to wear and tear, neglect exclusions apply when:

A business fails to take reasonable steps to protect property after a loss
Damage worsens due to neglect following an initial incident
A business ignores obvious safety hazards

Commercial Real Estate Loans explains that "if you fail to take reasonable steps to protect your property from further damage after a loss, the insurer may deny coverage for the additional damage."^[1]

6. Subcontractors and Third Parties

Many policies exclude:

Liability for work performed by subcontractors
Damage caused by third-party vendors or service providers
Claims arising from outsourced operations

This exclusion is particularly important for construction companies, IT firms, and other businesses that regularly work with subcontractors. To address this gap, businesses can request that subcontractors provide proof of their own insurance or purchase specific endorsements to extend coverage.

7. Contractual Liability

Standard liability policies typically exclude:

Liability assumed solely under a contract
Obligations that exceed what would be imposed by law
Indemnity agreements that transfer liability from others to your business

As Fits Small Business notes, "Liability assumed under a contract is usually excluded unless specifically covered by an endorsement."^[7]This means that if you sign a contract agreeing to take on liability that wouldn't otherwise be yours, your insurance may not cover it.

8. Commercial Auto and Workers' Compensation

Standard business liability or property policies exclude:

Auto accidents (requires commercial auto insurance)
Employee injuries (requires workers' compensation insurance)

Schlaw PC explains that "standard business liability policies do not cover auto accidents or employee injuries, which require separate specialized policies."^[8]These exclusions exist because these risks are covered by specific, often mandatory, insurance types.

9. Ordinance or Law

Many property policies exclude:

Costs to bring a damaged building up to current building codes
Demolition costs required by ordinance or law
Increased construction costs due to code changes

Commercial Real Estate Loans points out that "if your building is damaged and needs to be repaired, standard policies won't cover the extra expense of bringing the undamaged portions up to current building codes."^[1]This can be particularly costly for older buildings.

10. Vacancy

Property insurance policies often exclude or limit coverage for:

Buildings that have been vacant for a specified period (typically 30-60 days)
Certain perils like vandalism, water damage, or theft in vacant properties

According to Commercial Real Estate Loans, "If your property has been vacant for more than 60 consecutive days before a loss, coverage for certain perils may be suspended."^[1]This is particularly important for businesses with seasonal operations or multiple locations.

11. Professional Liability

General liability policies typically exclude:

Claims arising from professional services or advice
Errors or omissions in professional work
Failure to perform professional duties

Schlaw PC notes that "general liability policies exclude claims arising from professional services or advice; these require separate professional liability (E&O) coverage."^[8]This exclusion affects consultants, architects, engineers, accountants, and other service providers.

12. Defective Workmanship and Faulty Design

Many policies exclude:

Costs to correct faulty workmanship
Losses due to design errors
Damage from incomplete work

Gallagher Australia warns that "losses due to faulty workmanship, incomplete work, or design errors are commonly excluded, especially in construction and engineering policies."^[3]While the defective work itself isn't covered, resulting damage to other property sometimes is.

Summary: Common Business Insurance Exclusions

Exclusion Type	Examples/Notes
Wear and Tear/Maintenance	Gradual aging, lack of repairs
Intentional/Criminal Acts	Fraud, arson, deliberate damage
Catastrophic Events	War, terrorism, nuclear, floods, earthquakes
Pollution/Environmental	Contamination, hazardous spills
Neglect	Failure to maintain property/equipment
Subcontractors/Third Parties	Unless specifically included
Contractual Liability	Obligations only in contracts
Auto/Workers' Comp	Needs separate policies
Ordinance or Law	Costs to meet new codes
Vacancy	Properties left unused
Professional Liability	Errors in professional advice/services
Defective Workmanship/Design	Construction flaws, incomplete work

How to Address Insurance Exclusions

Understanding exclusions is only the first step. Here's how to address these coverage gaps:

1. Read Your Policy Carefully

Take the time to thoroughly read your policy documents, paying special attention to the exclusions section. If anything is unclear, ask your broker or insurer for clarification.

2. Consider Additional Coverage

Many exclusions can be addressed through endorsements or separate policies:

Flood or earthquake insurance for natural disaster protection
Professional liability insurance for service-based businesses
Environmental liability coverage for pollution risks
Ordinance or law coverage for building code compliance costs
Vacant building coverage for unoccupied properties

3. Work with an Experienced Broker

Insurance brokers can help identify potential coverage gaps and recommend appropriate solutions based on your specific business risks. They can also help you understand the fine print and negotiate with insurers.

4. Implement Risk Management Practices

Some exclusions can be mitigated through good risk management:

Regular maintenance programs to prevent wear and tear issues
Security measures to prevent theft and vandalism
Employee training on safety procedures
Contractual risk transfer strategies with vendors and subcontractors

Conclusion: Don't Let Exclusions Leave You Exposed

Insurance exclusions are a standard part of all business insurance policies, but they don't have to leave your business vulnerable. By understanding common exclusions, working with knowledgeable insurance professionals, and implementing appropriate risk management strategies, you can build a comprehensive insurance program that addresses your business's unique risks.

Remember that insurance policies vary widely, and what's excluded in one policy might be covered in another. The key is to know exactly what your policies do and don't cover, and to make informed decisions about additional coverage where needed.

Need help understanding your insurance coverage?

COVARAGE connects you with experienced insurance brokers across Southeast Asia who can help you identify and address potential coverage gaps in your business insurance. Our broker referral service is free and helps you find the right expertise for your specific needs.

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12 Common Business Insurance Exclusions Every SME Should Know