Every insurance policy has some exclusions. These are there to show what the insurance provider won’t cover. While they help insurers manage risk assessment, they also give you a clearer picture of what’s included and what’s not.
If you’re not aware of what’s excluded, you might think you’re covered for something that’s not in your policy documentations. This can cause unexpected financial stress, especially when your business operation is already struggling. That’s why it’s just as important to understand what isn’t covered as it is to know what is.
Not all losses are covered by commercial property insurance policies. While it offers strong protection against many risks, there are certain events and types of property damage that most policies do not cover. These are known as exclusions.
Below are some of the most common exclusions found in Australian policies. Being aware of these can help you avoid confusion or disappointment when filing a claims.
Wear and Tear or Gradual Deterioration
Insurance is designed to cover sudden and unexpected damage, not gradual and ongoing issues. Issues such as rust, mould, corrosion, or ageing are considered part of regular maintenance. If something breaks down because it is already worn out, it is unlikely your insurer will cover the repair. This also applies to a roof, where signs of wear and tear or gradual deterioration can include rusted gutters and/or downpipes, corroded roof screws (or roof irons), and fatigued roofing materials (such as rusted roof sheets or cracked tiles).
Flood and Natural Disaster Exclusions
Standard insurance policies usually don’t include flood insurance unless you’ve added it as extra cover. It’s also important to know how your insurer defines a flood. For example, water from a river or lake that overflows might count as a flood, not a storm, which could affect your property insurance claim. Some events, such as natural disasters like earthquakes or bushfires, may also have waiting periods or lower payouts unless you opt for optional cover.
Acts of Terrorism or War
Most commercial property policies exclude damage caused by terrorism, war, or civil unrest. These events are considered too unpredictable for standard insurance coverage. Some policies also specifically exclude war and nuclear risks and nuclear hazards. While this may not be a top concern for every business, it is still beneficial to be aware that such events typically fall outside most policies.
Inherent Vice
Insurance is generally designed to cover sudden and unexpected events. If something breaks down due to an inherent quality or defect within the item itself, it’s unlikely your insurer will cover the repair. For example, if an item of your insured property experiences inherent vice or latent defect, this is typically not covered.
Faulty Materials or Workmanship
If something at your property breaks because it wasn’t built or designed correctly, or due to issues like faulty materials or workmanship, your commercial property insurance policy probably won’t cover the repair costs. These types of issues are usually the builder’s or contractor’s responsibility. Suppose you’ve recently undertaken renovations or a construction project. In that case, it’s worth ensuring you have the right warranties in place in case something goes wrong.
Equipment Breakdown and Utility Failures
If machinery or equipment breaks down due to internal failure, such as mechanical, hydraulic, electrical breakdown or electronic failure or malfunction, it is not usually covered under a standard property policy. For example, suppose your refrigeration unit stops working due to a fault. In that case, the damage to the machine or the spoiled goods may not be covered under the claim.
Business Interruption Without Physical Damage
A lot of business owners think business interruption insurance covers all kinds of income loss, but that’s not always the case. Most policies only kick in when there’s physical damage to your property. Therefore, if your business is impacted by something like roadworks or a supplier delay, you may not be covered unless it’s specifically included in your policy.
Many business owners only discover gaps in their insurance coverage after they have made a claim. By then, it’s often too late to make changes. The good news is that most of these issues can be avoided with a bit of planning and the right advice.
Start by reading your policy documents, including your Product Disclosure Statement (PDS) and policy schedule. These documents explain what your insurance policy covers, what it excludes, and where you may need to add extra protection. If anything is unclear, it’s worth asking your insurance broker for clarification.
Here are a few practical ways to make sure your cover matches your needs:
- Speak to a broker who can help interpret the fine print.
- Review your policy every year, especially if your business has grown or changed.
- Ask about optional cover for high-risk areas like flood, machinery breakdown, or business interruption events.
- Keep detailed records of maintenance and upgrades to your property, which can support a claim if needed.
Sorting these things out ahead of time is one of the best ways to look after your business and avoid nasty financial surprises later on.
A small homewares shop near a creek in suburban New South Wales had a standard commercial property insurance policy. The owner decided to exclude flood coverage, thinking the risk was relatively low and wanting to keep the premium costs down.
One summer, heavy rain caused the creek to overflow, and water entered the back of the store. While the damage to the building was manageable, much of the stock was destroyed. When the owner submitted a claim, the insurer explained that flood events were not covered under the policy.
The owner had assumed that any water damage would be treated the same, but the policy distinguished between storm damage and flood damage. Without the optional flood extension, the claim was declined, leaving the business to carry the loss.
This situation highlights the importance of reviewing your policy wording and considering your specific location. An addition to the cover for extra premium could have made all the difference.
Commercial property insurance is a key part of protecting your business, but it’s not enough to know what is covered. Understanding what is excluded is just as important. These exclusions are there for a reason, but they can catch you off guard if you’re not aware of them.
Taking the time to review your policy, ask questions, and fill in any gaps can make a real difference when something goes wrong. Making small changes now, such as adding flood coverage or updating your policy after a renovation, can help you avoid bigger headaches later on.
If you’re unsure where to start, speaking with an insurance broker or adviser can give you the guidance you need. They can help tailor a policy that fits your business, giving you more confidence that you’re covered when it counts.
