The most common reasons insurance claims get rejected

The most common reasons insurance claims get rejected

When you're running a business, a rejected insurance claim can create significant challenges. Often, claim rejections come down to preventable mistakes, oversights, or misunderstandings. Here are the top reasons insurance claims get knocked back, and how you can avoid falling into the same traps.

1. Undisclosed or incomplete business activities

Many business owners unintentionally leave out key parts of their business activities when setting up insurance. Even if it is a very minor part of your business offering, or you expand your services within the policy period, to ensure your coverage is adequate, it needs to be declared.

Examples:

• A cafe that also sells catering services or hosts private functions
• A marketing agency that also offers event management services
• A consulting firm that offers project management services onsite at client locations

Tip: If your business has grown, pivoted, or added services, tell your broker, even if you think it's minor.

2. Using unlicensed or uninsured subcontractors

If a subcontractor causes damage or injury and they aren't licensed or insured, your policy may not cover it. Many policies have conditions that exclude cover for subcontractors who don't meet licensing or insurance standards.

Examples:

• Hiring subcontractors without valid public liability insurance
• Using subcontractors without proper licenses or certifications
• Failing to have formal subcontractor agreements outlining insurance responsibilities

Tip: Keep records of all subcontractors' credentials and insurance.

3. Policy doesn't cover the type of loss

One of the most common reasons for rejection is assuming you're covered for something you're not. Insurance policies have specific limits, exclusions, and optional covers, so it's important to understand exactly what risks your policy protects against. If a loss falls outside those parameters, the claim can be declined.

Examples:

• Thinking your tools are covered under general property (when they're not named or secured properly)
• Believing flood or storm surge damage is standard (it's often optional)
• Thinking that your Business Interruption policy will cover a cyberattack, most BI policies only cover physical property damage and you'll need to take out cyber insurance separately.

Tip: If you're unsure about whether specific losses are covered, ask your broker to explain exactly what's covered, and what's not, in your policy.

[Read: Cyber Claims Examples]

4. Poor maintenance or gradual deterioration

Insurance is for sudden, accidental loss, not wear and tear or neglected maintenance. If damage occurs, or is exacerbated, due to ongoing issues like lack of servicing, corrosion, or gradual deterioration, insurers typically won't cover the claim. It's important for businesses to keep up with regular maintenance and repairs to avoid these gaps in coverage.

Examples:

• Roof leaks from rusted sheeting
• Machinery failure due to lack of servicing
• Air conditioning that stops working because it hasn't been serviced in years

Tip: Schedule regular maintenance and document it, especially for property, vehicles, or plant equipment.

[Read: How neglecting property maintenance impacts claims]

5. Underinsurance

Being underinsured can lead to your claim being denied, or result in a reduced payout, when it matters most. Insurers rely on accurate, up-to-date valuations to assess risk. If your sums insured are too low, you may lose full cover or receive only a partial settlement, limiting your ability to make necessary repairs or recover from losses.

Examples:

• Not adjusting your sums insured after growth or new purchases
• Guessing instead of calculating your real exposure
• Not reviewing your sums insured to keep up with inflation or specific market conditions
• Declaring values below a policy's minimum requirement
• Providing inaccurate information about asset values

Tip: Review your sums insured annually and use a broker to help assess the real value at risk.

[Read: Are your sums insured up to date?]

6. Delayed notification

If you wait too long to notify your broker or insurer about an incident, your claim may be denied. Most policies, especially Professional Indemnity (PI) and Liability covers, include strict notification clauses that require you to report any circumstances that may give rise to a claim within a specific timeframe.

Insurers need prompt notification to properly investigate, assess the risk, and take steps to mitigate further loss. Delays can limit their ability to gather evidence or respond effectively and may result in claim denial or reduction, even if cover would otherwise apply.

Examples:

• Theft reported weeks after it was discovered
• Not reporting third-party injuries or property damage promptly
• A director becomes aware of a potential breach of professional duty but delays notifying until legal action is taken
• A written demand or complaint is received, but no action is taken until well after the response period has lapsed

Tip: Always notify your broker immediately, even if you're unsure whether a claim will eventuate. For PI and liability policies, even suspected issues or complaints should be flagged without delay, waiting for something to escalate can jeopardise your cover.

7. Lack of evidence or documentation

Claims often fall over due to missing paperwork, as insurers need clear proof to verify the loss and its cause. Without sufficient evidence, it becomes difficult to assess the validity and extent of the claim, which can lead to delays or outright denial.

Examples:

• No receipts or proof of ownership for stolen tools
• No photos showing the condition of the property before or after damage (especially if the area was cleaned up before photos were taken)
• No incident reports

Tip: Keep digital records of major purchases, take photos regularly, and document incidents immediately.

Set yourself up for fewer surprises

Most claim rejections stem from issues that could have been picked up early, if you know what to look for.

Take the time to read your policy documents thoroughly. If any part is unclear or raises questions, contact your insurance broker for clarification, they are there to support you and ensure you understand your cover. The more you understand your cover, the better prepared you'll be if something goes wrong.

Insurance works best when you stay informed, keep your cover up to date, and take a proactive role in protecting your business.

Need help navigating your insurance?

At Coverforce Insurance Brokers, we work with you to make sure your policy fits your business, not the other way around. Whether you're reviewing your cover or need support with a claim, our team is here to help every step of the way. Contact us today to speak with an experienced broker.

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