Stricter Practices in the Hard Insurance Market: How Carriers' Scrutiny of Insurance Applications Can Impact Claims Denials

In a hard insurance market, where insurance carriers face challenging economic conditions or increased losses, they may adopt stricter measures to mitigate risks and protect their profitability. One such approach involves closely scrutinizing insurance applications when claims arise. In some cases, carriers may use any errors, misstatements, or dishonest answers found on the application as grounds to deny a claim—even if the claim itself is unrelated to the information provided or would not have been affected had the information been accurate.

Previously…

Traditionally, when an insured individual applied for insurance coverage, carriers would assess the risk and determine the appropriate premium based on the information provided. If discrepancies or errors were discovered, carriers would typically adjust the premium accordingly to reflect the correct coverage or charge an additional premium to cover the rate difference. This approach allowed carriers to maintain a certain level of trust with their policyholders, acknowledging that mistakes happen and that the important factor was to ensure the policy provided the appropriate coverage for the risk.

Looking to the future…

During a hard market, however, insurance carriers face increased financial pressure due to factors such as rising claim costs, reduced investment returns, or other economic factors. To safeguard their bottom line, carriers may resort to more stringent tactics to minimize losses and limit their exposure. As a result, they may choose to interpret any inaccuracies or discrepancies on the insurance application as grounds for denying a claim, regardless of the claim's actual circumstances. This can include any risk management standards the insured is required to uphold, including sprinklers, fire extinguishers, security systems, cyber security practices, and more.

This approach can be frustrating for policyholders, especially if the inaccuracies or misstatements on the application have no bearing on the claim being filed. It essentially penalizes individuals for unintentional errors or omissions made during the application process. For example, suppose someone inadvertently misreported their previous address, employment history, or medical information on the application. In that case, carriers may exploit these discrepancies as a reason to deny a claim that is entirely unrelated to the information in question. Similarly, if the risk management standard is not being met, the insured may also deny the claim, even if meeting the standard would not have prevented a claim. For example: if fire extinguishers are found to be out of date or inadequate to the risk management standard, the insurance carrier may decline a claim even if the claim would not have been prevented by meeting the fire extinguisher standard, such as a claim for broken display windows.

The underlying rationale for this stricter stance is that carriers aim to minimize their risk exposure by ensuring accurate and reliable information from policyholders. By examining applications more closely, carriers seek to identify any potential red flags or misrepresentations that may indicate a higher risk. However, this approach can result in legitimate claims being denied due to technicalities or irrelevant discrepancies.

What insurance agents should do…

It is important for policyholders to be diligent and transparent when completing insurance applications, ensuring that all information provided is accurate and up to date. As an independent insurance agent, you should be assisting your clients in navigating the intricacies of an insurance application and available to answer any of their questions. Additionally, you should educate clients about the current market conditions and the risk associated with making misstatements on an application. You should also communicate with your clients throughout the year to remind them of the importance of updating relevant information and maintaining their risk management standards.