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Causes of policy coverage disputes in financial lines claims

Explore Marsh UK’s disputed claims data from the past four years, learn why insurers sometimes challenge cover, and how policyholders can avoid these disputes.

When reeling from a crime loss or facing a claim or regulatory investigation, no policyholder wants to wrangle with insurers over insurance cover.

In this article, we take a deep dive into Marsh UK’s financial lines disputed claims data from the past four years, providing insights into how and why insurers sometimes challenge cover and how policyholders can work to avoid these disputes.

The data

During the last four years, Marsh UK’s Financial and Professional (FINPRO) Claims Advocacy Team has recorded the reasons why insurers have tried to dispute coverage. These reasons have been collated and for the first time are published in the charts below. This data combines almost four years of disputed claims data from Q1 2021 to Q2 2024.

Data for all lines of FINPRO insurance

Figure 1 shows the principal reasons why insurers try to dispute cover and compares the relative frequency of different coverage disputes across core financial lines of insurance: financial institutions (FI), management liability (ML), professional indemnity (PI), and specie.

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Principal reasons insurers challenge coverage

Figures 2 and 3 compare the principal reasons for disputed claims between PI (errors and omissions (E&O) and civil liability) claims and ML (directors and officers (D&O)) claims. The totals include data from our financial institutions group.

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Principal reasons for disputed professional indemnity (E&O and civil liability) claims

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Reasons for disputed management liability (D&O) claims

When broken down in these different ways, the data reveals interesting insights.

Prior awareness

The most common reason for a declinature in the last four years across all FINPRO lines was “prior awareness” — accounting for 20% of explanations — meaning there was a perceived late notification to insurers.

Relative to other reasons for coverage disputes, prior awareness issues were more likely to be raised by insurers under PI, rather than D&O policies, with the figures for each totalling 24% and 17%, respectively.

While the reasons for this difference might be varied in a PI context, we often encounter circumstances where high value and/or more complex PI claims might more arguably relate back to earlier minor customer complaints that, in hindsight, may have required notification.

When considering prior awareness, insurers may challenge cover on the basis that a claim or circumstance (which “may” — alternative wording such as “is likely to” can be used — “give rise to a future claim”) existed and was known to the insured before inception of the policy, but was not reported to insurers.

If the insured then seeks to notify a later policy, an insurer may rely on the “prior known claims and circumstances” exclusion and/or a disclosure failure (which, in the UK, would be a breach of the “fair presentation” requirements under the Insurance Act 2015) to dispute cover. In this situation, there might be scope for a policyholder to argue coverage for a claim (less so for a pre-existing circumstance) to attach to a prior policy period. However, identifying the relevant date and level of awareness, particularly when the policyholder is a large entity, can often be challenging.

The scope for policy attachment disputes with insurers is reflected in our data that shows 5% of disputes concerned which policy year of account a claim should properly “attach” to.

Practical steps can be taken to help avoid coverage disputes arising from prior awareness issues. It may be possible to obtain a policy which allows for: (1) notification to be delayed until the anticipated quantum reaches a certain monetary threshold; and/or (2) claims to be deemed “first made” and circumstances “first discovered” only when a designated “responsible person” knows about them. Insureds can also help by tightening up their own internal reporting processes. This ensures that potential loss events are triaged correctly and routed via their broker, who can help with early assessment and the practicalities of notifying insurers effectively and in a timely manner.

Insuring clause not triggered

Our FINPRO-wide data shows the second most common reason for insurers to dispute a claim — accounting for 19.5% of disputes — is a failure to trigger the relevant insuring clause. This can happen for various reasons, including:

Insurers considering that there is no claim against the relevant party.
The absence of allegations of a wrongful act against an insured, which is often a requirement.
Even if there are allegations of wrongful acts, the acts did not occur in the course of providing professional services or while a director/officer was performing their professional duties.
In respect of crime losses, the insured did not suffer direct financial loss — or if there was financial loss, it was not caused by a risk underwritten in the policy.

Sometimes these declinatures result from an insured acting cautiously in notifying matters — and where the prospects of cover are acknowledged as being uncertain. This prudent approach can have strategic benefits because a notification of “circumstances” which might give rise to future claims against an insured can provide protection at an earlier stage than when those future claims might arise. This is due to PI and D&O policies typically being “claims made” policies which operate to allow an insured to notify circumstances which “may”/“could”/“are likely to” (policy wordings differ) give rise to the risk of future claims in order to preserve cover under the notified policy — and avoid declinature by future insurers relying on pre-existing circumstances exclusions.

The data shows that a higher proportion of D&O notifications (27%) were disputed due to a failure to satisfy the insuring clause, compared to around 14% of PI notifications. A common reason for D&O insurers to raise issues around an insuring clause is the need to establish the capacity in which an insured person is alleged to have committed “wrongful acts”.

Insureds should take care to clearly explain to insurers the nature of the allegations made (and those that may be made in the future) to evidence why and how they sufficiently relate to their business or an insured individual’s role within that entity. In both a PI and D&O setting, policyholders should also ensure that any changes in the services they provide are communicated to insurers. This helps to ensure that relevant definitions remain sufficiently broad and the scope of cover is adequately disclosed to insurers before the policy’s inception.

Exclusions

Reliance on an exclusion is the third most common reason for insurers to decline cover, accounting for 17% of cited reasons in our FINPRO data. This is unsurprising, perhaps, given exclusions are there to make it clear to both parties which risks insurers expressly do not intend to cover. Exclusions can serve to rule out certain types of claims or losses, but can also help confirm if a particular element of a loss is outside the scope of cover — for example, losses related to fraudulent acts which form part of a wider and otherwise covered negligence claim.

By way of example, a standard exclusion we commonly see raised in PI claims, particularly in a financial institutions context, is the “contractual liability” exclusion. This excludes cover for losses arising from contractual arrangements between the insured and a third party, and where no non-contractual liability (arising out of tort or statute, for example) would otherwise exist. In such cases, for claims initially brought solely in contract, the insured might decrease the risk of a declinature by highlighting instances where they also owed tortious or fiduciary duties, which have not yet been argued by a claimant but might in future, if the claim is allowed to progress.

Other commonly raised exclusions include:

Those concerning restitutionary losses — with fees, commissions, and charges often carved out of the cover.
Those which apply when claim allegations raise fraud and dishonesty issues, often referred to as conduct exclusions.

In such cases, insurers can be expected to at least reserve the ability to rely on a conduct exclusion to limit cover — albeit that conduct will typically have to be “proven” before the exclusion becomes applicable.

Costs

Making up over 10% of disputed claims, costs issues can be contentious. The data shows that between 2021 and 2024 almost 20% of D&O disputes and 9% of PI disputes related to the issue of costs.

Understandably, insured persons held personally liable often demand leading specialist lawyers to represent their interests. And when multiple insured people are all accessing the same insurance policy, insurers will often contrast differing hourly rates and the amount of time charged by the respective lawyers and attempt to negotiate these down.

It is important to try to reach an agreement with insurers about legal costs as early as possible. Insurers decline to pay legal costs largely for three reasons:

Hourly rates are deemed unreasonably high.
The insured has incurred unreasonable costs overall in defending or investigating allegations made against them.
The costs claimed do not fall within the definition of those claimed under the policy.

However, it is often possible to avoid or reduce costs-based disputes by:

Working with insurers early on to agree reasonable rates for external consultants, such as defence lawyers. These might include discounts that the insured is able to negotiate with the supplier.
Ensuring that external consultants are conducting their work within the parameters of the coverage and control costs by providing regular costs updates and justification of the work being done to both the insured and insurers.
Submitting only those costs covered by the policy to insurers for payment.

Aggregation

Aggregation is an issue we often consider in the context of professional negligence claims, where multiple clients and/or investors are potential claimants. The data reflects this, showing that 9% of all PI disputes and 5% of D&O disputes relate to aggregation. While aggregation can favour an insured or insurers, depending on factors such as policy limits and deductible levels, often an insured will prefer that multiple claims and/or losses arising out of seemingly the same or related issue(s) are aggregated to form one claim for indemnity.

Policy wordings are often wide enough to allow for broad aggregation of related matters. But aggregation debates can also be technical, complex, and fact specific requiring close examination by both sides before a resolution can be found.

Breach of condition

Refusal to cover for breach of condition accounts for just under 6% of our recently disputed claims. A refusal by insurers to pay, due to a breach of a policy term or condition, can be frustrating for two reasons. First, a breach of condition is often avoidable, if an insured is cognisant of the terms of the policy and endeavours to comply with them. This includes seeking prior written consent to incur costs and entering into settlement agreements. Second, unless titled or otherwise interpreted to have “condition precedent” status, breaches of “bare conditions” (where insurers’ interests have not been prejudiced) seldom lead to limitations of cover. It is therefore always advisable to comply with conditions to prevent any issues arising, which can be done by working with your broker to fully understand policy requirements.

Quantum disputes

While quantum disputes only make up around 5% of disputed claims, they are nonetheless important, given they impact the level of an insured’s financial recovery.

A quantum dispute occurs when insurers argue the first-party losses claimed are too high (for example, in respect of a crime or cyber loss). Quantum disputes also arise in a third-party liability context, where a claim settlement arguably exceeds the underlying legal liability of the insured — i.e., an insured paid a third party too much. In such disputes, it is often crucial that insureds have their own external consultants (for example, loss adjusters or lawyers), who can challenge an insurer’s position based on their own expert analysis of the true financial loss or the likely future loss that a settlement is mitigating.

How to avoid claims disputes

Disputed claims cannot be eliminated completely. Insurers often argue to limit cover and preserve the parameters of their policies for legitimate reasons. However, some disputes are certainly avoidable if policyholders ensure, for example:

Policy wordings are as broad as market conditions might realistically allow and appropriate for the policyholder in question.
Policy notifications are carefully managed and interactions with insurers are productive with “no surprises”.

Despite best efforts by both sides, disputes over coverage with insurers do arise. A supportive broker in your corner can make a significant difference, if such disagreements occur.

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