diff --git a/test/conformance/kuttl/policy-validation/cluster-policy/invalid-timeout/README.md b/test/conformance/kuttl/policy-validation/cluster-policy/invalid-timeout/README.md
index c787181e12..8c81c1c150 100644
--- a/test/conformance/kuttl/policy-validation/cluster-policy/invalid-timeout/README.md
+++ b/test/conformance/kuttl/policy-validation/cluster-policy/invalid-timeout/README.md
@@ -4,4 +4,4 @@ This test tries to create policies with invalid timeouts (`< 1` or `> 30`).
 
 ## Expected Behavior
 
-Policies shoudl be rejected.
+Policies should be rejected.
diff --git a/test/conformance/kuttl/policy-validation/cluster-policy/policy-exceptions-disabled/00-policy.yaml b/test/conformance/kuttl/policy-validation/cluster-policy/policy-exceptions-disabled/00-policy.yaml
new file mode 100644
index 0000000000..b20ef0bd7d
--- /dev/null
+++ b/test/conformance/kuttl/policy-validation/cluster-policy/policy-exceptions-disabled/00-policy.yaml
@@ -0,0 +1,6 @@
+apiVersion: kuttl.dev/v1beta1
+kind: TestStep
+apply:
+- policy.yaml
+assert:
+- policy-assert.yaml
\ No newline at end of file
diff --git a/test/conformance/kuttl/policy-validation/cluster-policy/policy-exceptions-disabled/01-policy_exception.yaml b/test/conformance/kuttl/policy-validation/cluster-policy/policy-exceptions-disabled/01-policy_exception.yaml
new file mode 100644
index 0000000000..3d58a1627c
--- /dev/null
+++ b/test/conformance/kuttl/policy-validation/cluster-policy/policy-exceptions-disabled/01-policy_exception.yaml
@@ -0,0 +1,4 @@
+apiVersion: kuttl.dev/v1beta1
+kind: TestStep
+apply:
+- policy_exception.yaml
\ No newline at end of file
diff --git a/test/conformance/kuttl/policy-validation/cluster-policy/policy-exceptions-disabled/02-resource.yaml b/test/conformance/kuttl/policy-validation/cluster-policy/policy-exceptions-disabled/02-resource.yaml
new file mode 100644
index 0000000000..c20f0dfc04
--- /dev/null
+++ b/test/conformance/kuttl/policy-validation/cluster-policy/policy-exceptions-disabled/02-resource.yaml
@@ -0,0 +1,5 @@
+apiVersion: kuttl.dev/v1beta1
+kind: TestStep
+apply:
+- file: resource.yaml
+  shouldFail: true
\ No newline at end of file
diff --git a/test/conformance/kuttl/policy-validation/cluster-policy/policy-exceptions-disabled/README.md b/test/conformance/kuttl/policy-validation/cluster-policy/policy-exceptions-disabled/README.md
new file mode 100644
index 0000000000..c2aa0dccf9
--- /dev/null
+++ b/test/conformance/kuttl/policy-validation/cluster-policy/policy-exceptions-disabled/README.md
@@ -0,0 +1,7 @@
+## Description
+
+This test is attempting to create a resource with the label "app: my-test-app", which would typically violate the policy defined. However, there is a policy exception defined for resources with the same label, which should bypass the policy. Since the Policy Exception feature has not been enabled, the resource will be blocked by the policy instead of being allowed.
+
+## Expected Behavior
+
+The Pod should be blocked.
\ No newline at end of file
diff --git a/test/conformance/kuttl/policy-validation/cluster-policy/policy-exceptions-disabled/policy-assert.yaml b/test/conformance/kuttl/policy-validation/cluster-policy/policy-exceptions-disabled/policy-assert.yaml
new file mode 100644
index 0000000000..996222eb02
--- /dev/null
+++ b/test/conformance/kuttl/policy-validation/cluster-policy/policy-exceptions-disabled/policy-assert.yaml
@@ -0,0 +1,9 @@
+apiVersion: kyverno.io/v1
+kind: ClusterPolicy
+metadata:
+  name: require-app-label
+status:
+  conditions:
+  - reason: Succeeded
+    status: "True"
+    type: Ready
\ No newline at end of file
diff --git a/test/conformance/kuttl/policy-validation/cluster-policy/policy-exceptions-disabled/policy.yaml b/test/conformance/kuttl/policy-validation/cluster-policy/policy-exceptions-disabled/policy.yaml
new file mode 100644
index 0000000000..f69ca35c45
--- /dev/null
+++ b/test/conformance/kuttl/policy-validation/cluster-policy/policy-exceptions-disabled/policy.yaml
@@ -0,0 +1,21 @@
+apiVersion: kyverno.io/v1
+kind: ClusterPolicy
+metadata:
+  name: require-app-label
+spec:
+  validationFailureAction: Enforce
+  background: false
+  rules:
+    - name: require-app-label
+      match:
+        any:
+        - resources:
+           kinds:
+           - Pod
+           - Deployment
+      validate:
+        message: Pod must include the 'app=my-app' label
+        pattern:
+          metadata:
+            labels:
+              app: my-app 
\ No newline at end of file
diff --git a/test/conformance/kuttl/policy-validation/cluster-policy/policy-exceptions-disabled/policy_exception.yaml b/test/conformance/kuttl/policy-validation/cluster-policy/policy-exceptions-disabled/policy_exception.yaml
new file mode 100644
index 0000000000..92a5a4e769
--- /dev/null
+++ b/test/conformance/kuttl/policy-validation/cluster-policy/policy-exceptions-disabled/policy_exception.yaml
@@ -0,0 +1,21 @@
+apiVersion: kyverno.io/v2alpha1
+kind: PolicyException
+metadata:
+  name: label-exception
+  namespace: default
+spec:
+  exceptions:
+  - policyName: require-app-label
+    ruleNames:
+    - require-app-label
+  match:
+    any:
+    - resources:
+        kinds:
+        - Pod
+        - Deployment
+        namespaces:
+        - default
+        selector:
+         matchLabels:
+           app: my-test-app
diff --git a/test/conformance/kuttl/policy-validation/cluster-policy/policy-exceptions-disabled/resource.yaml b/test/conformance/kuttl/policy-validation/cluster-policy/policy-exceptions-disabled/resource.yaml
new file mode 100644
index 0000000000..8fbfab9c00
--- /dev/null
+++ b/test/conformance/kuttl/policy-validation/cluster-policy/policy-exceptions-disabled/resource.yaml
@@ -0,0 +1,10 @@
+apiVersion: v1
+kind: Pod
+metadata:
+  name: my-pod
+  labels:
+    app: my-test-app
+spec:
+  containers:
+  - name: nginx
+    image: nginx