An exclusion is a situation, item or cause of loss that an insurance policy specifically does not cover. Exclusions are set out in the policy wording and define the limits of the cover, so any claim falling within one can be refused.
In one line: An exclusion is something a policy explicitly does not cover, allowing the insurer to refuse a claim.
How an exclusion works
Exclusions appear in the policy document and limit what the insurer will pay for. Common examples include wear and tear, driving without a valid MOT, business use not declared, or damage from an event the policy was never meant to cover.
If a home policy excludes gradual damp and a 4,000 GBP repair is needed for slow water damage, the insurer can decline the claim, because the cause falls within a stated exclusion rather than a sudden insured event.
General exclusions apply across the whole policy, while specific exclusions attach to particular sections of cover.
Exclusion vs excess
An exclusion removes a risk from cover entirely, so no payment is made at all. An excess applies to a covered claim and is simply the policyholder's contribution towards a loss the insurer does otherwise pay.
Reading the exclusions before buying matters, because an event the customer assumed was covered may sit outside the policy.
Primary source: FCA: Insurance