Why claims get declined?

The phrases used often by all of us during internal & external training programs are ” The moment of truth is Claims” & ” Proof of the pudding lies in the eating” — yet claims, do get declined with some regularity. The percentage of claims declined, the classes of business in which it happens and insurer-wise declination can all be studied, debated, disputed without any end. The aim of this post is not to get into theses areas but make a granular analysis or introspection on why claims get rejected in the first place. A wrongful/ fabricated/ aggravated  claim should not be paid, for sure & hence before going into the analysis, we lay down the following  ground rules:

• This analysis relates only to marine cargo claims
• There are three parties to a claim- the claimant (assured), the insurer & the intermediary. We can add a fourth– the loss assessor.
• None of the above-mentioned parties has any mala-fide intention. The assured is willing to share all required information to the insurer/intermediary after the loss. The intermediary, in turn will submit this to the insurer along with his explanations/elaborations. The insurer’s intent is look at the claim dispassionately & the loss assessor acts as an independent professional should do.
• This relates to the current situation in the Indian non-life market.

If all the parties involved act the way as stated above, then there should be no claims getting rejected, is it not? Not true, still some claims run into trouble and let us see the reasons why.

1. Coverage not in line with assured’s business requirement: This is the most common reason for claims getting declined — Either the transit in which the loss occurred is not covered under the policy, the cargo damaged/lost is not covered, the packing done or not done is not as per policy conditions or a restricted cover has been given in certain cases & the loss does not fall within this. Why does this happen? At the time of proposal, the complete logistics pattern & assured’s business is not shared by the assured. Again two reasons for this – i) The assured is in a tearing hurry and wants to look at only the lowest price, little realizing the importance of a detailed discussion & with multiple intermediaries hankering for his account, assured feels he has options galore. ii) Assured may be willing to have a detailed discussion, but with many intermediaries around, none wants to lose out on time or irritate the assured (as they perceive it). They go ahead with their standardized Quote slips and there are always insurers willing to offer terms. 
2. Insurer’s quotes inappropriate (No contract certainty): Based on the incomplete or insufficient information submitted, insurers churn out quotes. As underwriters have responsibility not only for top-line & bottom-line but also time-lines, they resort to rule-based quotes and raters in the name of technology. Unfortunately, a marine cargo policy cannot fit into a pure grid-based formula like a Motor Car policy does.Critical requirements often get missed out which come back to haunt the assured in a claim situation. Underwriting gets bypassed knowingly/unknowingly. Again, insurers’ quotes, at times do not carry all the definitions, conditions & warranties. These are hard-coded in the policy document. In essence, the quote does not fully represent what the policy will contain. Contract certainty? Question is why does the intermediary not check these differences? While paucity of time may be cited as a reason, the prime reason could be lack of knowledge. These hard-coded conditions/definitions often decide if a claim is to be paid or rejected.
3. Loss assessor’s judgement considered final: Not quite uncommon is this reason for claim rejections. The loss assessor may be acting with the best of motives and intent but if there is some additional information/evidence/data which could possibly impact or change the judgement, same is not pushed by insurers or the intermediaries. Reason? Again lack of confidence and knowledge to argue effectively on technicalities.

Let me cite two instances where detailed discussions before the proposals were concluded, which provided new insights and helped in structuring a better policy document. The first happened when I was an underwriter. There was this proposal for some chemical in bulk. Our quote was on ICC-A terms with a condition that contamination losses, if any will be payable only if caused by a peril covered under ICC-B. Intermediary insisted that contamination also be covered on ICC-A terms. I explained to him that we would like to shift the onus on the assured for proving the contamination and hence if it was established that one of the ICC-B perils had caused the contamination, claim would be admissible.  In case cover for contamination was on All-Risk terms, the onus would be on us as insurers to prove that the loss fell under any of the named exclusions, something we wanted to avoid. The intermediary listened to me patiently and agreed to my view but added that even if the onus on proving the loss was shifted to the assured, limiting cover to ICC-B perils would be too narrow. What if a different chemical from a neighboring tank in the vessel were to seep into assured’s tank of chemicals because of a hole developed in the tank  and contaminate it? This will not form part of ICC-B. Realizing the genuine demand, we immediately changed the wording to ” Excluding contamination unless caused by accidental, external means”.

The second instance was when we approached a new client who was in the business of selling refurbished laptops with a turnover of around INR 3 billion. He showed us his existing policy copy which stated that used items/second-hand items were covered on ITC-B terms only. Further there was a condition that any loss to software/operating system was not payable. We discussed further and learnt that selling refurbished laptops was big business because the price at which they were sold was 50-60% that of a new laptop. Further information was that 1) these laptops carried a one-year warranty 2) none of the original manufacturers had any objection to refurbished laptops of their brands were sold. 3) Every laptop refurbished was loaded with a new, licensed Microsoft operating system & they were duly authorised by Microsoft. So where was the need to exclude loses to licensed software/operating systems. They had been duly acquired and cannot be reproduced without license and  hence any loss to the same had to be paid. Why not an All-Risk cover to the refurbished laptops which were sold with a one-year warranty?  When entire used plants from abroad are imported, based on a Valuer’s certificate for residual life, is the marine cargo cover limited? Why even extension for dismantling is considered at times. So we assured the assured ( pun intended) that cover on ITC-A basis will be possible.

In a nutshell, Time constraint. lack of adequate knowledge & fear among all parties concerned, often result in a rightful claim getting declined. This being a touchy yet thorny issue, I invite readers’ views, be they insurers, assureds, loss assessors or intermediaries. Will stand corrected if the reasons are rebutted with alternate arguments.