diff --git a/src/index.js b/src/index.js
index 031d637..78aa278 100644
--- a/src/index.js
+++ b/src/index.js
@@ -29,7 +29,9 @@ function makeShouldSkip () {
         // nyc was configured in a parent process (keep these settings).
         config = {
           include: nycConfig.include,
-          exclude: nycConfig.exclude
+          exclude: nycConfig.exclude,
+          // Make sure this is true unless explicitly set to `false`. `undefined` is still `true`.
+          excludeNodeModules: nycConfig.excludeNodeModules !== false
         }
       } else {
         // fallback to loading config from key in package.json.
diff --git a/test/babel-plugin-istanbul.js b/test/babel-plugin-istanbul.js
index bb80efd..91d58e3 100644
--- a/test/babel-plugin-istanbul.js
+++ b/test/babel-plugin-istanbul.js
@@ -30,6 +30,32 @@ describe('babel-plugin-istanbul', function () {
       result.code.should.not.match(/statementMap/)
     })
 
+    context('local node_modules', function () {
+      it('should instrument file if shouldSkip returns false', function () {
+        var result = babel.transformFileSync('./fixtures/node_modules/should-cover.js', {
+          plugins: [
+            [makeVisitor({types: babel.types}), {
+              excludeNodeModules: false,
+              exclude: ['node_modules/**'],
+              include: ['fixtures/node_modules/should-cover.js']
+            }]
+          ]
+        })
+        result.code.should.match(/statementMap/)
+      })
+
+      it('should not instrument file if shouldSkip returns true', function () {
+        var result = babel.transformFileSync('./fixtures/node_modules/should-not-cover.js', {
+          plugins: [
+            [makeVisitor({types: babel.types}), {
+              include: ['fixtures/node_modules/should-not-cover.js']
+            }]
+          ]
+        })
+        result.code.should.not.match(/statementMap/)
+      })
+    })
+
     it('should call onCover callback', function () {
       var args
       babel.transformFileSync('./fixtures/plugin-should-cover.js', {