Why are exclusions included in a warranty contract when they are confusing, unwanted and misunderstood? They limit coverage, so most people believe they are a bad thing. Our aim to is to help you gain a new perspective on exclusions, mostly known for their negative connotation, and understand their purpose to help eliminate any resistance toward them.
Reasons why exclusions aren’t bad.
1. Eliminating or reducing overlapping coverage.
Chances are, you have several other insurance policies, such as general liability, to reduce your business’ liability. Exclusions are added into warranty contracts to ensure that a builder isn’t liable for items that might be covered under their other insurance policies, i.e. overlapping coverage.
For example, the warranty excludes the homeowners’ consequential damages or losses. These damages are excluded because the commercial general liability insurance would cover consequential damages that result from a defect. If these damages were not excluded from the warranty you would be paying for double coverage. Similarly, homeowner’s insurance covers damage due to windstorms and water escape. This coverage is excluded in the warranty because it would result in increased cost when coverage is provided elsewhere.
2. Removing coverage not provided by a typical insurance carrier.
Most insurance carriers do not cover civil disobedience and unusual events such as hurricanes, earthquakes, explosions and other unforeseeable incidents. These catastrophic events seldom occur and the associated premium is expensive. Excluding these coverages reduces the cost of the warranty.
3. Accessories unrelated to the structure of the home.
The warranty does not cover items that are not structural components of the home; hence coverage for fences, landscaping, sprinkler systems, porches and swimming pools are excluded.
4. Damage that is made worse or causes by other acts.
Damages caused or made worse by others are excluded out of fairness and in the interest of encouraging good moral behavior. It wouldn’t be fair to impose liability under the warranty when the damage is caused by someone else’s negligence. Examples of when this could occur include: the homeowner has a different contractor to perform alterations to the home and this work causes damage or the homeowner turns the home into a restaurant. The builder should not be liable for these unanticipated uses. Further, when the damage is covered by the warranty, the homeowner has a duty to mitigate the damage.