5 reasons why an insurer might reject your claim

Published: Tuesday, 13 April 2021

Having a potential PII claim is stressful enough, without worrying about whether insurers will cover it.

Insurers can reject a claim if the policy conditions have been breached. They may also ‘reserve their rights’, which means that they need more evidence before accepting or rejecting a claim.

From an insurance point of view, in the last few years, we have seen a marked change in direction, with rising premiums and more challenging conditions. Natural disasters – storms, forest fires, earthquakes have been followed by some very large construction losses, such as the Grenfell tragedy, and more recently Covid-19 with unusually high Business Interruption losses, travel and event cancellation claims.

As a result, Insurers find themselves under pressure and this has led to some exiting the PI market altogether, with others now very selective about the type of business risks that they are prepared to cover.

Unsurprisingly we have also started to see a shift in the attitude of Insurers and in the way that they view and assess new notifications and claims. Policy terms and conditions are being checked closely to ensure that every clause is being complied with.

Insurers will not always immediately accept a claim notification as valid (applying a ‘reservation of rights’). This is happening on a more regular basis because of potential breaches of these policy conditions which can lead to increased pressure on the professional during what is already a stressful time. Some of the most common breaches that can lead to an Insurer reserving their rights to refuse indemnity are:

1. Late notification of a claim or circumstance –often we hear that the policyholder considered the issues raised amounted to a simple complaint, that could be resolved internally. However simple complaints can often lead to more complex issues and if an Insurer is not involved at the outset, they may well suggest that notification has been late.

   The expected timescale for the notification of new claims and circumstances clauses can be very strict (you should check your policy for the exact wording as this can differ between insurers) and if this timescale is not complied with this can lead to a claim being rejected.

2. Corresponding with a client over a complaint/allegation without seeking prior Insurer approval – when an issue first arises, we frequently find that policyholders want to send an immediate response, but this is a potential breach of a policy condition. Insurers like to monitor and approve all correspondence before it is sent to ensure that nothing prejudicial is discussed that could later be detrimental to their position.
3. Making any admission of liability – even when an error is obvious. Sometimes it seems that there is no option other than to admit an error has been made, but this should not be contemplated without first receiving Insurer’s approval. Even when an admission is necessary, Insurers like to ensure that it is carefully considered and worded appropriately. Making any kind of admission without Insurer’s input is likely to result in the claim not being covered.
4. Disclosing Insurers involvement. If a claimant discovers the presence of an Insurer, it is often viewed as an open cheque book and an admission of liability that can encourage a claimant to pursue their action more vigorously. Insurers stay in the background to protect their client – they monitor and guide from ‘arm’s length’ until it becomes necessary for them to have more active involvement. In many cases, claims are stopped in their tracks by a strongly worded letter of defence without the Insurer’s involvement ever coming to light. There will be some occasions where clients are specifically asked to disclose or confirm the identity of Insurers but again, this should always be with their approval.
5. Information disclosed at renewal not being accurate. It is more important than ever now to ensure that, at each renewal, a true and fair representation of the risk is made to Insurers and that anything material is disclosed. If facts are withheld, even innocently, and a claim later arises, it is possible that the claim will not be indemnified.

Example 1

A firm of accountants was retained by a large client to carry out accounting services, bookkeeping, payroll and VAT returns. A member of the accountancy firm also had a share in the client business. An issue arose over the transfer of funds for shares and the relationship between various parties involved in the firm soured. The accountant received several letters questioning various issues but failed to bring this to the attention of Insurers until some months later when proceedings had been issued.

The issues developed in one policy period and crossed a renewal into the next policy year, and it seems that the parties had originally tried to agree a full and final settlement – none of this was disclosed to Insurers until proceedings were issued.

Insurers appointed lawyers to investigate policy coverage, and, in the meantime, the Accountant had to fund his own defence. Insurers refused to provide indemnity and the Insured had to fund a settlement of £65,000.

The Accountant later took action against Insurers to try and reverse their decision on indemnity and, eventually, a contribution was agreed but this only amounted to about 30% of the claim.

Example 2

The Insured had been involved in the introduction for several of their clients to various tax schemes but failed to disclose this to Insurers at renewal – had it have been disclosed it is unlikely that Insurers would have provided a quote. The rumblings of a claim commenced and the Insured then tried to deal with it internally.

It was not disclosed at the next renewal and was notified to Insurers until proceedings were issued. Insurers appointed solicitors to investigate policy coverage and the policy was avoided due to material misrepresentation. This also meant that any other unrelated, and otherwise valid, claims that had been reported under the now voided policy were not covered either.

The claim ran into several millions of pounds.

It is better to err on the side of caution and notify insurers of all possible issues as swiftly as possible and before you enter any correspondence with the client. If you are in any doubt about what constitutes a notifiable event, please do not hesitate to contact us and we will happily provide you with guidance and support.