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Understanding the reason for an insurance claim refusal

There are five main reasons for refusal of an insurance claim:

  1. damage not caused by disaster - your insurance policy will only cover damage caused by an insurable event and not damage that was pre-existing
  2. non-disclosure - you have not disclosed information when you applied for or renewed the policy
  3. operation of a condition or exclusion clause - you have failed to comply with an insurer's requirement or the policy does not cover the loss
  4. fraud - the insurer believes you have acted fraudulently in some way
  5. policy cancellation.

1. Damage not caused by disaster

It is your job to show that the furniture, fittings or buildings covered by your insurance were in fact damaged at the time of the event (such as storm or cyclone). If an expert has provided an opinion that suggests your property was already damaged or in a poor state of repair, it will be necessary to provide competing evidence (possibly expert evidence) to contradict this. Legal advice will help you sort out what evidence would help your case. For more information read the "What if I had a defect in my home I was unaware of?" below.

2. Non-disclosure

You are under a duty to disclose relevant information when you take out your policy, or when you renew it. If you did not provide accurate or comprehensive information, your insurer may be able to reject your claim.

Some common examples of non-disclosure are:

  • not disclosing all prior insurance claims (eg burglaries)
  • not disclosing criminal offences (eg arson)
  • not disclosing existing damage (eg existing roof damage).

There are two ways that you are required to disclose information:

  1. when the insurer asks you specific questions
  2. when you find out something you know, or a reasonable person in your position could be expected to know, is a matter which would be relevant to the insurer's decision to accept the policy.

You are not required to disclose:

  • something you don't know
  • something that reduces the insurer's risk
  • something that is common knowledge
  • something that your insurer knows or ought to know
  • if your insurer has waived your need to comply.

The Insurance Contracts Act limits the circumstances in which your claim can be denied as a result of disclosure.

Your insurer has a duty to clearly inform you of the nature and effect of your duty to disclose. If they have not done this, they cannot rely on your non-disclosure to refuse a claim unless your non-disclosure was fraudulent. Renewal notices that you receive each year will normally inform you of your duty to disclose. If you fail to do so, the insurer may be entitled to refuse your claim.

If you failed to disclose something when the policy was taken out, or at renewal, your insurer cannot reject your claim unless it can show that it would have refused to provide you with insurance if it had known the missing information. If, for example, your insurer would have given you insurance cover had it known about your recent claims history, but would have charged a higher premium, then your insurer cannot reject your claim on the basis of the non-disclosure (although it can still require you to pay a higher premium). To find out if your insurer would have proceeded with the insurance, you should request a statutory declaration by the insurer's underwriter. If one is not provided, you should complain to the AFCA who will require your insurer to prove it would not have provided you with insurance cover in the first place.

If you failed to notify your insurer of something that happened during the period of cover under the policy, your insurer can only rely on your non-disclosure to refuse or reduce your claim if it can demonstrate that it has been prejudiced by your non-disclosure.

It is the responsibility of your insurer to prove that a nondisclosure allows the insurer to reduce or deny your claim.

So, if your claim has been refused on the basis of non-disclosure then you need to:

  1. First establish if you relied upon an insurance broker to take out the policy or renew it. If the broker is responsible for miscommunication, then your complaint may be about the broker and not the insurer and you need to seek legal advice urgently.
  2. Write to your insurer and ask them to specify what information was not disclosed. You may wish to argue that you did in fact disclose the missing information, or that it was reasonable in the circumstances not to disclose because of something your insurer did or did not ask or tell you.
  3. If you did not disclose the information, ask your insurer to provide a copy of its underwriting guidelines to show whether it would have provided you with insurance cover if you had provided them with the relevant information.

If you believe that your claim has been improperly refused you may:

  1. complain in writing to your insurer's Internal Dispute Resolution (IDR) department; if that does not resolve it then
  2. complain to the General Insurance Division of the AFCA (they will usually require you to complain to the insurer's IDR department first); if that does not resolve it then
  3. go to court.
Remember: When you arrange an insurance policy over the phone, the call is often recorded. Your insurance company will therefore often have very good evidence about what was said at the time. Your insurer is required to send your policy information to you in writing within 14 days. Your policy information will usually contain a summary of what you have disclosed for you to check and correct if necessary.

3. Operation of a condition or exclusion clause

Insurance contracts often contain conditions and exclusion clauses.

Examples of conditions include:

  • you must maintain your house to ensure that it is in good condition
  • you must have keyed locks on all windows and deadlocks on all external doors.

You need to check your policy to find out what the applicable conditions are.

Your insurer may refuse your claim if you have failed to comply with a condition. However, section 54 of the Insurance Contracts Act states that the insurer cannot refuse to pay a claim because of some act or omission, but they can reduce the amount paid to you to the extent their interests have been prejudiced by your actions or inactions. For example, if you have failed to install keyed locks on all windows and a thief enters your premises by smashing a window, or knocking down the front door, you may be able to argue that your failure to install or maintain the window locks has not prejudiced your insurer because it did not contribute to the loss or damage suffered as a result of the break in.

Most insurance policies also contain exclusions. An exclusion is a situation or event that is NOT covered by the policy. Some examples of events that may be excluded are:

  • flood
  • fair wear and tear
  • damage arising from faulty construction/design
  • subsidence, erosion and seepage.

Some of the more common exclusions are discussed below.

To rely on an exclusion clause the insurer has to prove on the balance of probabilities that the exclusion clause applies. In some cases your insurer may also have an obligation to bring the exclusion clearly to your attention, although this does not need to be done in person. It would usually be sufficient to include this information in the documentation sent to you when you took out the policy.

Flood

If you were discouraged to put in your claim because your insurer says that your damage was caused by flood and flood is not covered by your policy then you should lodge a claim anyway. This is because your insurer may not be correct.

If your claim is rejected because your insurer says it was caused by flood then you need to get legal advice because:

  1. sometimes the insurer agrees to pay claims anyway when many people are affected
  2. if the damage is caused by both rainwater and flood then you may still be able to get your claim paid where, for example, the rainwater entered your house first or the damage was caused by rainwater coming through a hole in the roof (even if floodwater entered the house as well)
  3. if the water that entered your house and caused the damage was a combination of both floodwater and rainwater then the doctrine of "proximate cause" applies. This means that you are not covered at all (not even 50/50 if the water was half rainwater). The doctrine says that where damage is the result of two causes under the policy, one covered and one excluded, then the insurer does not have to pay the claim.

For more information read the "My home and contents have been damaged by water - what do I need to know?" section of this guide.

What if I had a defect in my home I was unaware of?

Insurers sometimes deny claims because they say that the damage was caused by a pre-existing defect in the property (for example, that the roof let water in because it was poorly constructed). Section 46 of the Insurance Contracts Act provides you with an argument against this. Section 46 states that if you were unaware of the defect when you entered the insurance contract (and a reasonable person in the circumstances would not have been aware of it) then the insurer cannot refuse the claim.

Wear and tear/damage over time

The insurance policy will often exclude "wear and tear" and damage caused by failure to maintain the home. For example, a storm may blow tiles off your roof. The insurer may refuse to pay the claim if your house was old and the tiles needed replacement anyway because of their age. Insurance policies are not a substitute for failing to maintain your home.

If your insurer rejects a claim because of wear and tear then you need to try to get:

  • evidence to show that the damage was caused by a storm or other event covered by the policy
  • evidence of regular maintenance work and inspections
  • evidence of the state of repair of the home generally.

4. Fraud

To establish fraud your insurer needs to prove that you intended to deceive the insurer or acted with reckless indifference as to whether or not your insurer was deceived.

If fraud is established by your insurer then it can reject your insurance claim and void your policy. This means you no longer have insurance cover. In serious cases, the matter may be referred to the police for investigation and you may be charged with a criminal offence.

Your insurer cannot rely on rejecting your claim on the grounds of fraud if the fraud was minor and it would be unfair for your insurer to reject the claim.
Insurers are always on the lookout for fraud. To avoid being investigated:

  • be cooperative
  • provide all relevant details
  • provide evidence (eg witnesses, photos).

If you are being investigated for fraud, get legal advice immediately.

If you are being investigated by your insurer, some tips include:

  • try to remain calm
  • take your time to think through questions before answering them
  • ask for a break if you need one
  • if your interview with the investigator is being recorded, ask for a digital copy of the interview or transcript
  • if English is not your first language, request an interpreter
  • do not sign anything you are unsure of
  • seek legal advice before and after the interview.

When a dispute is being decided by the AFCA, one of their staff members called the Referee decides all disputes where fraud has been alleged. The Referee may request additional information from you or your insurer and, where appropriate, interview you or other willing witnesses in person.

5. Policy Cancellation

Insurers sometimes cancel insurance policies in the middle of the period of insurance cover. This may be done in response to additional information provided by you that increases your insurer's risk to an unacceptable level. Another very common reason is that you have failed to pay the premium for the policy. This is particularly likely if you have opted to pay your premium in instalments via direct debit and your direct debit has failed.

If your insurer tells you that your policy has been cancelled, you should get advice about whether they had sufficient reason to cancel the policy and whether they took appropriate steps to inform you of the cancellation in accordance with their legal obligations. If you wish to dispute their decision to cancel the policy, or argue that they have not properly notified you of the cancellation, you can make a complaint to the AFCA.

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