What To Do if Your Business Insurance Claim Is Denied

Small businesses depend on commercial insurance to cover property damage, pay for lost shipments, and more. If their insurance company denies a claim, businesses may face repair bills and litigation costs they can't pay.

There are ways to prevent claim denial before it happens. If the insurer denies your claim, you can still get payment. You have a limited time to challenge a denied claim, so you should know what you will do when that happens.

We'll review your claim denial options now. For other commercial insurance articles, visit FindLaw's Business Liability and Insurance page.

What Is an Insurance Claim Denial?

When a small-business owner buys a commercial insurance policy, it includes an explanation of benefits. Somewhere in the fine print is a description of covered losses. These are all the things your insurer will pay for when you file an insurance claim. One reason for claim denial is filing for damages not covered by the policy, such as filing for a car accident on your company's general liability insurance.

The insurance policy also describes the insurance claims process. The procedure is formulaic and follows strict deadlines. All insurance providers have different requirements for how you must start an insurance claim. For instance, some insurance carriers want notification within 24 hours of damage that may result in a claim. Others may want you to send a notice through their website. Failing to do so can compromise your entire claim.

When your claim does not meet the requirements set by the insurance company, or they have reason to suspect fraud or inaccurate information, the insurer returns the claim to the business owner.

Review the Rejection Notice

If you receive an insurance claim marked "rejected," you should first look at the reasons for the rejection. Many business owners panic and call their attorneys only to find that things are not that dire. The notice itself should tell you what the problem was with the claim.

Industry experts have found some common reasons why a claim might be returned that would not be an outright rejection:

• Insufficient Documentation: Perhaps the claim was for a damaged roof, but you only sent photos from ground level. The insurer delayed the claim until you can send images of the roof from above.
• Failure To Update Your Policy: Did you claim something you purchased since you bought the policy but neglected to add? Your insurer needs additional information for the new computer, stove, or other gadgets not on the original policy.
• Unpaid Premiums: Businesses often let their specialty policies (earthquake, sinkhole, hail) lapse the month before a major natural disaster. Adjusters may work with small-business owners, but reactivating your policy will cost you all the unpaid premiums. (The option is entirely up to your insurance carrier.)

Review Your Policy

Some things in your policy are nonnegotiable. Your business owner's policy (BOP) will cover your property, general liability, and lost income. It will not cover flood damage or vehicle accidents. You can't file claims for things your insurer won't cover.

You must also meet all deadlines and paperwork requirements in the policy. If your insurer wants the claim within 45 days, they may negotiate with you if it arrives on the 46th day (not always). They will not negotiate if it arrives on the 90th.

According to industry reports, delays and improper paperwork are among the top reasons for claim rejection.

Prepare a Response

You may want to consult an insurance attorney when it's time to draft your claim denial response. The insurance appeal process is as complex as the claims process, and more depends on it. Your policy should explain the appeal process, but an attorney can explain what more you should do for a successful appeal.

• Fully Document Your Claim: If any additional facts would support your case, make them now.
• Mitigate Further Losses: One mistake business owners often make is failing to make repairs, thinking it will reduce their payout. You have a duty to limit the damage once you submit your claim. Your attorney can explain what you must do in mitigation.
• Keep a Running Tab of Your Expenses and Income: Be ready to show how much the damage has cost and how much income you have lost. This is essential for reimbursement.

You or your attorney should prepare an appeal letter countering the denial of claim notification. This letter and additional information go to the insurance company's board of appeals or similar bodies. The insurance company may reverse the denial. If not, you will need to sue in civil court.

Bad Faith Denials

A legitimate insurance claim denial is made when an adjuster believes the claim is invalid or the policy does not cover the damage. A bad faith denial occurs when the adjuster breaches their duty of good faith and fair dealing.

A failure to investigate or a cursory investigation can lead to a bad faith denial when it does not uncover the entire nature of the damage. However, generally, an insurance adjuster may substitute a photographic review for an in-person review of the property, although an insurance company may follow up a photo review with an in-person estimate.

Offering a settlement below the assessed damage, or lowballing a claim, is an alternative to outright denial. A lowball claim may be an attempt to avoid litigation.

Bad faith insurance denials are situations that require an attorney's assistance. Depending on your insurance policy, your appeal options may include arbitration or a lawsuit.

Discuss Your Claim Denial With a Lawyer

Litigation should be your last resort when faced with an insurance claim denial. Insurance companies have legal departments on their side. FindLaw's insurance law attorney directory can help you find legal advice in your area.