Why Insurance Claims Get Reduced or Denied

Why Insurance Claims Get Reduced or Denied & Protect Your Payout

Filing an insurance claim is stressful enough without the shock of discovering that your insurer will only pay part of it, or nothing at all. Whether you’re insuring a building, your stock, or your business income, a claim can be reduced or rejected for many reasons. Understanding these pitfalls is the best way to avoid them.

This guide walks you through the most common causes of reduced or denied insurance claims and offers practical tips to help ensure that, when you need your policy most, it responds as expected.

1. Underinsurance: When Your Cover Isn’t Big Enough

What it is
Underinsurance occurs when the sum insured is set too low to cover the true value of your property, stock, or business interruption exposure. If a loss occurs, the insurer can apply the “Average” clause—reducing the payout in proportion to the shortfall.

Example
If your premises should be insured for £1 million but you only insured them for £500,000, a £100,000 loss might result in a payout of only £50,000.

How to prevent it

• Base building cover on the rebuild cost, not the market value. Include demolition, debris removal, and professional fees.

• Insure contents and stock for the full replacement cost.

• Review valuations annually and adjust for inflation and major purchases.

2. Business Interruption: Getting the Indemnity Period Right

Business interruption cover starts the day the loss happens, not when you reopen. Twelve months is rarely enough for most businesses to return to full trading.

• Aim for at least 24 months, and property owners often need 36.

• Factor in planning permissions, equipment lead times, and supply-chain delays.

3. Public Liability Limits Too Low

If your public liability limit is inadequate, you may have to pay damages above the policy ceiling yourself. Many contracts with large clients or government bodies specify minimum limits—often £5 million or more. Check your contracts and consult your broker to set the right figure; increases to £10 million are often inexpensive.

4. Non-Disclosure and the Insurance Act 2015

The law requires you to make a “fair presentation” of the risk when you take out or renew a policy. Failing to disclose material facts—past claims, County Court Judgments, insolvencies of related businesses—can void the policy even if the omission isn’t related to your claim.

Action steps

• Conduct a “reasonable search” for all relevant information before renewal.

• Double-check your Statement of Fact and correct errors immediately.

• When in doubt, disclose.

5. No Insurable Interest

You can only claim for property or assets you have a financial interest in. For example, if a leased vehicle stored on your premises is destroyed but wasn’t disclosed or insured in your name, the insurer can refuse to pay.

6. Missing Paperwork

Receipts, invoices, maintenance records, and certificates all matter. Without proof of ownership or value, insurers may dispute or reduce a claim. Create a digital record of key documents and back them up.

7. Breach of Warranties or Policy Conditions

Policies often contain strict conditions. Breaching them—even inadvertently—can void a claim.

Common examples:

• Security warranties: alarms and locks must match the policy wording.

• Waste removal or hot-work warranties: contractors using heat tools or leaving flammable debris must follow specified safety practices.

If a third party causes a breach (for instance, an alarm company disables your system), you may be able to pursue them for recovery, but the insurer may still decline your claim.

8. Misunderstanding Declared Values and Uplifts

Some policies increase sums insured annually by a percentage uplift. That does not replace the need to set the correct “Declared Value” at the start of each year. An incorrect base figure can still trigger underinsurance penalties.

9. Incomplete Business Description

Your premium is based on the activities you declare. If your business starts offering new services—say, welding or roof work—without notifying your insurer, a claim linked to that activity may be rejected.

10. Late Notification

Many policies require prompt notice of any claim or potential claim, especially liability claims. Delays can hinder investigations or legal defense and give the insurer grounds to refuse cover. Notify your broker or insurer immediately, even if you’re unsure who’s at fault.

11. Storm and Weather Disputes

Storm claims are frequently challenged. Insurers may argue that:

• No qualifying storm occurred, or

• Damage resulted from poor maintenance (e.g., worn-out flat roofs or clogged gutters).

Regular maintenance and clear evidence—like dated photographs—help counter these disputes.

12. Tips to Smooth the Claims Process

If a loss occurs, act as if you are uninsured. Mitigate damage and document everything:

• Secure the property: board up broken windows, isolate water or electricity if safe.

• Protect undamaged stock and arrange temporary security if needed.

• Photograph all damage and keep detailed records of communication, costs, and actions.

• Reassure customers and suppliers to protect ongoing relationships.

• Notify authorities (environmental agencies, HSE, local councils) if required.

For professional indemnity or business interruption policies, notify your insurer as soon as an incident occurs—even if no formal claim has been made.

13. Communication Pitfalls

• Be precise and truthful when answering insurers’ or loss adjusters’ questions.

• Confirm all conversations in writing to avoid later disputes.

• Keep damaged property if third-party recovery is possible; do not dispose of evidence without insurer approval.

14. Repairs and Contractors

Insurers may insist on using their own repair networks. If the insurer’s contractor performs poor work, the insurer must fix it. But if you hire your own contractor without agreement, you may bear responsibility for any shortcomings. Always agree specifications in writing.

15. Lease Agreements and Responsibilities

Commercial tenants should understand their lease obligations for maintenance and insurance. Confusion about who covers what can delay or reduce a payout.

16. Business Interruption and Gross Profit

Insurance policies define gross profit differently from standard accounting. An incorrect calculation can lead to underinsurance and reduced claims. Work with your broker or accountant to set the right figure when arranging cover.

17. Other Complications

• Reservation of rights: If you receive this notice, your insurer is reserving the option to deny the claim later. Seek expert advice immediately.

• Arson vs. malicious damage: Different perils carry different terms and excesses. Classification matters for payout.

• Forensic accountants: Insurers may bring them in to scrutinize your costs during a business interruption claim. Keep detailed records and control expenses.

Key Takeaways

Insurance is a partnership: you provide accurate, complete information and maintain your property and records; the insurer via the insurance broker provides financial protection when disaster strikes. To safeguard your payout:

1. Set accurate sums insured and review them annually.

2. Disclose everything—activities, financial history, new purchases.

3. Meet policy conditions and keep evidence of compliance.

4. Act quickly and document thoroughly when a loss occurs.

By taking these steps, you reduce the chance of unpleasant surprises and increase the likelihood of a full, timely settlement when you make a claim.

Disclaimer: This article provides general information only and does not constitute financial or legal advice. Always consult a qualified broker or advisor regarding your specific insurance needs.