Top 10 reasons for claims not being paid – Practical tips for brokers

As the FCA’s Consumer Duty sets higher and clearer standards of consumer protection across financial services, all of us in the insurance industry are required to put our customers’ needs first.

With this in mind, our team of Chartered Loss Adjusters recently identified the main reasons for claims not being paid by insurers with the objectives to support our broker partners with practical tips when it comes to offering insurance cover to their customers.

If an insurance policy is setup incorrectly with inaccurate information, potential problems will arise for the policyholder which may result in their claims not being paid.

Brokers need to fully understand the information needed at inception of the policy to ensure that the cover is as required, and the correct Sum Insured is calculated. This will ensure that everything that matters to the customer is fully covered by their insurance policy.

The examples listed below are all preventable, if the correct information is provided and related accurately to insurers and if all the relevant questions are discussed between the broker and their customers.

Underinsurance across all covers.

If there is underinsurance on any insured item then often a claim settlement will be reduced by the proportion of the underinsurance (e.g. item 40% underinsured, so insurers only pay 60% of the claim value). Always ensure that the correct value of any item to be insured has been provided and policy period inflation is taken into account when calculating a sum insured.

Inadequate Business Interruption indemnity period.

The indemnity period is the period of cover for a business interruption loss. There is only cover during this period and once the period end is reached the cover and claim ceases. Many are set at 12 months which is far too short and often results ongoing losses beyond the 12 months which are not covered. As a general rule any indemnity period should be a minimum of 24 months.

Lack of experience/expertise of the insurer loss adjuster (on claims below £100k) who are also not willing to make decisions.

Smaller claims (below £100k) are often handled for insurers by junior and trainee loss adjusters. They may lack experience in handling claims, often do not understand the issues and all too often are unwilling to make decisions in meetings necessary to drive the claim forward.

Non-disclosure especially in relation to CCJ’s, insolvencies, etc.

When a policy is taken out, insurers ask questions that form a Statement of Fact. Examples include asking if the applicant has ever been made insolvent, been a director of a company that went into administration and has had any County Court Judgement against them. Incorrect answers that are given could void the policy. At inception ensure the insured is aware of such disclosure requirements and double check with them before submitting statement of fact.

Lack of insurable interest.

This is when the person making the claim has no insurable interest in the damage. For example, in a domestic claim if a relative of the insured who is not named on the policy makes the claim. Another example would be if a person borrows a friends watch which is stolen whilst in their possession. They would have no insurable interest in the watch and could not claim for it under their own insurance.

On property owners covers, fires caused by a cannabis farm which is now excluded under many wordings.

Under a property owners cover, providing the cause of a fire to a tenanted property was fortuitous as far as the insured (the landlord) is concerned, then there is cover. This included fires due to a tenant’s illegal cannabis farm. However, an increasing number of insurers are now specifically excluding any fire damage caused by a cannabis farm. If you have property owner clients, it is recommended to check at inception such an exclusion in in the wording.  

Misrepresentation that is immaterial but under the Insurance Act, insurers many insurers are stating that they would never have accepted the risk.

Under the Insurance Act if there is an innocent misrepresentation then insurers cannot void cover but must decide whether they would have accepted the risk if they had been aware of the correct information. Some examples of such innocent misrepresentation are occurring where in our experience an insurer would normally have accepted the risk with the correct information, but the insurer here takes the stance that even with this information they would not have accepted the risk and they refute the claim.

Lack of supporting documentation to support claim, for example no electrical certificate or receipts etc for cash sales.

A claimant is required to support values claimed. Where an insured is unable, or simply does not, produce supporting invoices or estimates for lost items. Insurers may turn down the claim. Another example is where there is a requirement under the policy for the property insured to have an electrical test by an approved electrician, but the insured cannot produce the necessary Electrical Test Certificate. If your client suffers a loss, it is important to ensure the necessary documentation is provided to support the claim.   

Breaches of security warranty.

In recent years we have seen a growing increase in the number of theft claims where there is a breach of the policy security warranty. Typical examples are alarms not set or responded to when activated and minimum-security standards not met. At inception it is important to draw a client’s attention to any such security warranties and ensue the client understands that these must be complied with.

Not understanding Day One/Declared Value basis of cover.

Many insured’s, especially in the SME sector, are confused by the existence of two figures on the schedule, the Declared Value, and the Sum Insured. They do not understand that it is the Declared Value that must equate to the replacement value of the insured item but think that as the sum insured appears to be an adequate replacement value then they are fully covered. It is important that the client fully understands how such a Day One policy works and the difference between the Declared Value and the Sum Insured.