When your business files an insurance claim, it may be denied for various reasons. But what happens if your insurance company denies your claim for one reason and later gives a different reason for that denial? Is this legally permissible? The short answer is: sometimes yes, but not without limits.
Common Reasons for Denial
When you submit a claim to your commercial property, liability, or business owner policy insurer, the insurer must determine whether the loss is covered under the terms of your insurance contract. Possible reasons for denial include lack of coverage for the type of loss claimed, late notice or late filing of a claim, insufficient documentation, or lapse in the policy, among others.
Under most state insurance laws and standard policy language, the insurer must provide a written explanation for a claim denial that cites the relevant policy provision. This ensures transparency and allows you to understand why the claim was denied.
Changes to the Reason for Denial
Insurers might change or supplement an initial explanation once new information comes to light. For instance, a claim initially denied for “insufficient evidence” may later be denied for “lack of coverage” or another reason after the insurer receives and reviews additional documents.
However, if an insurer shifts to a wholly new reason for its denial – particularly after you challenged the original reason – you may be able to assert certain defenses against the insurer.
Motivations for an Insurer to Change its Denial Reason
Insurers may look to shift gears for a variety of reasons. The insurer may not have fully analyzed the claim before issuing its original denial, or it may have made an administrative error. In some cases, there may be more than one independent reason for denial under the terms of the policy, but the insurer may have initially relied on the most obvious one. During the appeal process, additional information might undermine the original basis for denial, prompting the insurer to search for alternative defenses.
Late changes to the denial reason can deprive policyholders of a meaningful opportunity to respond to the reason prior to the appeal stage, while creating a moving target for the policyholder’s appeal strategy.
Duty of Good Faith
Insurers have a duty of good faith and fair dealing, which requires them to investigate claims in a reasonable and timely manner, and which precludes them from changing their rationale for claim denial without a fair basis. When an insurer suddenly shifts reasons for a denial, it may indicate the insurer lacked a sound basis for its original reason and is trying to come up with any strategy that will allow it to avoid liability for the claim.
What Courts Will Consider
Courts will scrutinize changes in denial reasons to determine whether the insurer acted reasonably and in good faith, whether the policy supports the denial, and whether the business was prejudiced by the change. If the loss is clearly not covered under the policy – regardless of the initial explanation – the court may allow the change in denial reason. Similarly, the court may be more likely to allow the change if the insurer originally provided the policyholder with a Reservation of Rights letter, which is a formal notice stating that the insurance company is investigating the claim and reserves the right to deny coverage for some or all of it based on the results of the investigation.
If, however, an insurer knowingly failed to assert a particular defense when denying the claim, a court may find that the insurer waived that defense. In particular, the change in denial reason may be disallowed if the policyholder would have acted differently had they known about the new reason, or if the change harmed the business’s ability to respond. If the denial appears inconsistent or strategic on the insurance company’s part, the court will be more likely to disallow it. In some jurisdictions, a lawsuit alleging bad faith may be brought against the insurer, who will face additional damages beyond the original policy limits if found liable.
What To Do if Your Insurer Changes Its Reason for Denial
When faced with a change in denial reason, carefully compare the new denial letter with previous communications from the insurance company and the policy language. You can appeal directly to the insurance company, or consider hiring an attorney who is experienced in business insurance disputes to negotiate with the insurance company on your behalf. A knowledgeable attorney can determine whether the insurer’s shift in reasoning is legally permissible and what your best strategy would be to challenge the denial. Experienced attorneys can often resolve disputes with insurance companies without the need for litigation. By crafting compelling factual and legal arguments with supporting evidence, your attorney may be able to convince the insurer to reconsider its determination in order to avoid the risk of costly litigation and, if applicable, bad faith allegations.
Depending on the strength of your case, the insurer may reverse its position and fully cover the claim, or it may agree to settle the claim for an amount that you find acceptable.
If your business insurance company has denied or is challenging your claim, contact Schwartz Conroy & Hack, P.C. We have the expertise, experience and tenacity to make insurance companies keep their promises to you and your business.
