Why insurance claims get rejected

Published in Mint on 21 January 2016, Written by Kapil Mehta
We buy insurance expecting claims to be paid and feel bitter when that does not happen. In an ideal world, insurers would communicate terms in easy-to-follow language; buyers would take the time to read about what they are buying; documents to file a claim would be simple; and helpful customer service executives would ask for bank details to transfer the claim payment. Nothing is further from reality.
I recently watched Steven Spielberg’s Bridge of Spies, a film set during the Cold War, about a first-rate insurance lawyer who used his negotiating skills to strike superb deals for the US with Russia and Cuba. How I wish we had such insurance settlement lawyers represent our own buyers. Claim rejection is high and until there is a better grievance handling system, we would do well to understand why. There is little public information on this subject and I draw from experience with hundreds of claims to list out the main reasons for rejection. Watch out for these in your own insurances.
Health insurance claims are denied because hospitalisation was due to a pre-existing disease not disclosed. The fact that a disease is pre-existing gets found out from the doctor’s case history. When insurers smell a rat, they ask for the daily hospital and surgical notes as well. These, almost always, bring out the truth because the patient’s medical background is captured accurately for all the medical staff to refer to. The diseases that are hidden most often are hypertension (good medication can prevent this from being diagnosed), diabetes (medicine comes to the rescue again), internal cysts and neurological diseases such as epilepsy. When a claim is rejected patients get indignant but, often, the subterfuge was deliberate. Where insurers go overboard is in their messianic zeal to classify everything as pre-existing. There are situations where an innocuous comment by the doctor, for example, in listing out a possible differential diagnosis such as “sugar?” has resulted in rejection. In many cases the root cause of hospitalisation is subjective. For example, was the sharp drop in haemoglobin because of pre-existing piles or newly-discovered ulcers? Once the insurer takes a position on this, generally in its own favour, it is hard to convince it otherwise. Life insurance and overseas travel claims are also rejected primarily due to non-disclosure of pre-existing medical problems.
In motor insurance, claims are often rejected because of negligence. Did you leave the keys in the car? Start the engine when it was flooded? Drove with an expired licence? Were you drinking and driving? Recently, on Quora, a question-and-answer website, someone asked me the implication of leaving a note on his car saying “Steal Me!” and it gets stolen. Although provocation is not excluded, I doubt if that specific claim will be paid. Insurers look for signs of negligence in police or medico-legal reports. Your description of the accident needs to be consistent to the insurer, surveyor, investigator and anyone else who calls. Another reason for rejections is that the vehicle is in commercial use but the insurance is for personal.
Home insurance claims don’t get paid because of specific exclusions relating to normal wear and tear, seepage and short circuits. Fires caused by short circuits, wall damage due to seepage are common rejections. The other issue in home insurance is that they are incorrectly placed. For example a basement, which is a material risk for insurers, is not declared. Or the fact that the house has been unoccupied is not mentioned. Or that there is commercial activity such as paying guests or small offices being run on the premises are not described. A problem that I recently encountered is that the person who bought the insurance does not have an insurable interest in the home. For example, a tenant buys building insurance or the facilities management company in a high-rise buys home insurance rather than the home owners themselves.
Burglary claims are rejected because the buyer didn’t inform the insurer that the house would be unoccupied for an extended period of time. The second most common issue is that insurance covers burglary, as in a forced break-in, but not theft, which is an inside job. Many claims go unreported as it is undisclosed cash or gold that is filched. Severe underinsurance, when the value of goods is understated to keep premiums low, also results in rejection.
Marine insurance covers goods in transit, when you relocate or send material elsewhere. These claims are rejected because standard insurance covers accidents whereas claims often relate to pilferage or damages without an accident. Someone I know was transferring a valuable figurine in a truck. En route the statue disintegrated. The claim was rejected because there was no evidence of an accident. The customer’s vivid make-believe portrayal of how the truck driver had to swerve to avoid a collision struck no chord.
Professionals such as doctors, chartered accountants and architects often buy liability insurances to cover negligence related litigation. The number of claims filed in these liability insurances is still low and it will be interesting to see how often claims get paid in the future. The contracts are stringent and there will be ample opportunity to reject claims. The key here is to describe the scale and nature of your business accurately in the proposal form.
Small businesses buy insurance to cover losses to computers and phones. These claims are denied mainly because the damage was caused by negligence. Laptops are most prone to such denials. Generally, laptops get spoilt due to rough use, which is not claimable.
Most of us buy insurances with a single-minded focus on price. Claim rejections can be prevented if we had a single-minded focus on product features instead, such as mediclaim with low waiting periods, home insurance with an accurate description of structure and contents, marine insurance that covers all-risks rather than just accidents. These cost more but make the insurance meaningful.
My focus here has been on rejected claims. There is equally valuable information embedded in paid claims. For example, in 2015, a leading cause of claimed children’s injuries was the trampoline. In Delhi these “bouncys” are ubiquitous at birthday parties. Now, finally, I have a scientific reason to forbid my children from clambering on to them. More on this and other risks next time.