Article Reviewed by a licensed insurance professional: Sam Meenasian (CA dept of insurance license #0F75955).
Estimated reading time: 9 minutes
Key Takeaways
- Business insurance acts as a safety net against risks like property damage and employee injuries, but claims can be denied.
- Real-life examples illustrate how proactive measures and routine maintenance can prevent claim denials.
- Having the right coverage, such as workers’ compensation and commercial auto insurance, is essential for protecting your business.
- Specific risks, like cyber breaches and environmental spills, require specialized insurance to cover potential losses.
- Business owners should read policy exclusions carefully, bundle coverages smartly, and document everything to avoid surprises.
Running a business means dealing with risk, property damage, lawsuits, employee injuries, auto accidents, cyber events, and more. Any business owner knows that things may go wrong all the time. In fact, what I hear from my business owner clients is that things usually go wrong when you least expect them. So you have coverage in place for when something like that happens.
Business insurance is a safety net that you need. You want to keep your doors open after facing a claim, and you don’t want to close them for good. However, claims don’t always work out the way you think, and surprises happen when commercial claims get denied. It could be for several reasons, but you’ll want to be prepared for the situation no matter what the reason is.
Below, we will discuss some specific situations I’ve seen and why the claims were denied or accepted in those situations. These examples should be able to help you figure out why certain claims get denied
1. Fire Damage at a Bakery
I once had a bakery owner client. She came in one morning and saw fire damage from the night before. The fire department got there in time to save the building, but not everything in it. The next morning, the entire kitchen was blackened, and entire shelves of ingredients and tools were no longer usable. She filed her claim, thinking she’d be in good hands with the insurance company. She had paid her premium, so she wasn’t worried.
But the insurance company declined. The adjuster notices signs of prior electrical failure. They use that evidence to show that the problem existed and was simply ignored by my client. Unfortunately, they use that to deny a significant portion of her claim.
The moral of the story is that if you see something unsafe in your business, it’s better to fix it immediately than wait for disaster to strike. Insurance companies also include provisions in their contracts that exclude ignored problems. You can’t just wait for dangerous hazards to fix themselves. Instead, you should be proactive and inspect your premises regularly for anything that could become a hazard in the future. Routine maintenance and documentation reduce the risk of coverage disputes, but coverage depends on the policy’s terms, conditions, exclusions, and the facts of the loss.
2. Customer Slip and Fall
Many businesses face slip and fall lawsuits. Even if a business is proactive, wet floors pop up unannounced all the time. It’s hard to clean up every spill on time or even just to warn of a spill. The sad part is that all it takes is a moment for a customer to be holding the wrist and in pain and thinking about suing your business because they fell on your property.
If you have general liability insurance, that may be enough to cover the injury to a customer. That’s good news. But be warned that you need a specific type of insurance called workers’ compensation Insurance to cover accidents that harm your employees.
So make sure you have both types of coverage so that you are fully covered.
3. Storm Damage to a Warehouse
Storms are a part of life that can be unpredictable and cause serious damage. But no matter how unpredictable they are, Wind/hail/tornado coverage typically sits inside a commercial property policy (often with a separate wind/hail deductible). Flood and some water events usually require separate coverage.
One business owner I know learned this the hard way. He owned a supplement factory in Oklahoma, and when a tornado came through, his Factory was hit. He was left with a ton of property damage, and his inventory was all but gone.
It turns out he was lucky that a tornado damaged his property and not a flood. Although many people assume that water damage is covered by storm insurance, it’s not. Floods require a different insurance policy. So I told him to get the proper insurance for flood, that way if next time it’s a flood and not a tornado, he may be covered as well. Flood is commonly excluded from standard commercial property forms and is typically handled via a separate flood policy (through the National Flood Insurance Program or private markets), sometimes with limited flood coverage only by endorsement.
4. Theft of Tools and Equipment
Theft of tools and equipment can be a serious drain. think of a contractor who leaves his tools on the site until morning. But when he gets there the next day, all of his tools are gone because they were stolen. Right from out of the truck.
He had coverage for his tools and equipment that paid for stolen property. Since the tools were stolen from the job site, he was covered pursuant to his insurance agreement.
However, to be clear, some policies are scheduled, others are blanket with per-item limits. The key is whether the tools qualify as covered property and you’re within any per-item/per-loss limits and theft conditions.
If you want to keep valuable property on the job site, make sure that you have reasonable security measures in place and that all items you leave there are listed on your policy. Otherwise, insurance companies may deny your claim, insisting that the items were not specifically covered or that you didn’t take proper precautions to secure your own property.
5. Burst Pipe and Water Damage
Burst pipes can happen unexpectedly. Pipe failures could come from freezing, corrosion, pressure changes, poor installation, root intrusion, or soil movement. The weather could also be a contributing factor.
This exact scenario happened to my buddy John. John’s business was closed on the weekend, and when he returned on Monday, he realized that a pipe had burst and caused water damage. Luckily, he had coverage for this within his commercial insurance.
However, if the insurance company decided that there were signs that the pipe would burst that John had ignored, they could have denied the claim. So it’s very important to do routine inspections where possible to avoid any accusations that you contributed to the covered event.
6. Employee Injury at Work
If you are in a business that poses risks to human safety, such as construction or other similar industries, you will need protection for your employees. Think of people doing work on high surfaces like scaffolding or using dangerous tools like saws or climbing high ladders. Those are situations that are common but not necessarily safe. Unfortunately, injuries often happen in these situations, and they come with real-life consequences.
As an employer, you need workers’ compensation insurance for employee injuries. Workers’ comp requirements vary by state and employer type, but most states require coverage once you have employees, with penalties for noncompliance. Confirm with your state’s rules. This type of insurance helps cover medical costs, lost wages, and provides other benefits. You need this insurance to protect your business from work-related claims.
Commercial general liability typically excludes employee bodily injury, with limited exceptions depending on endorsements and legal theories. I’ve seen it time and time again where employers think that their general liability policy will protect their injured employees. It does not, and the employer will be left picking up the check and potentially facing legal problems if they don’t have workers’ compensation coverage.
7. Company Vehicle Accident
One time, I had a situation where a bakery van was running late, and it slammed into the back of a sedan during work. Suddenly, the bakery owner found themselves in the middle of a financial and legal battle that they had not seen coming.
Commercial Auto Insurance is necessary in these cases to cover the costs of injuries and vehicle repairs. It can also pay for legal fees associated with injured third parties and their claims against you.
Commercial auto insurance covers vehicles that are used for legitimate business purposes. Personal auto may cover some incidental business use, but many policies exclude certain business uses (delivery, livery/rideshare, vehicles titled to a business, etc.). If vehicles are used regularly for business or owned by the business, commercial auto insurance (and/or hired & non-owned auto) is usually appropriate.
8. Cyber Breach and Data Theft
Cyber breaches and data theft come with huge losses. For these situations, you need specialized insurance. This type of insurance is called cyber insurance. It covers the cost for experts to fix the problem, and it also covers the cost of notifying customers whose data may have been breached.
Some cyber policies may restrict coverage if you fail to maintain the minimum required controls. Stay up to date on your protections to remain covered under your cyber insurance policy.
9. Professional Mistake
If you’re in the business of giving advice, you need professional liability insurance. Even the best professionals make occasional mistakes. If you’re in a business like architecture, your mistakes could lead to Serious damages and faulty building structures.
However, if you have professional liability insurance, you may have coverage for certain claims arising from professional errors, omissions, or negligent services, subject to the policy’s terms, conditions, and exclusions.
Now remember, you still have duties as a professional. Professional liability is designed for negligence (unintentional errors). It typically excludes intentional wrongdoing, fraud, criminal acts, and may deny claims if there was prior knowledge or late reporting under claims‑made terms.
10. Environmental Spill
This insurance type is sometimes called pollution liability insurance. It protects your business from the financial consequences of pollution-related accidents.
We once worked with a repair shop owner who spilled oil that required a big environmental cleanup. That meant excavators, dump trucks, and testing teams, plus disposal costs. You need to have coverage if you deal with materials that can lead to environmental pollution. Be extra careful when dealing with these harmful substances, as it will save you in the long run.
Again, if you ignore problems that you know about, such as gradual leaks, the insurance company will use them against you to deny your claim. You need to be diligent in your business and inspect potential environmental polluters regularly.
Final Word
The right policy keeps your business standing.
Key Takeaways for Business Owners
- Read your exclusions carefully.
- Bundle coverage smartly.
- Document everything.
- Maintain your property.
- Ask for endorsements.
A Personal Word From an Insurance Pro
After 20 years helping entrepreneurs protect what they’ve built, I’ve seen it all when it comes to insurance denials. You need the right coverage.
At USA Business Insurance, we make that part easy. We listen and match policies to your real risks. Plus, we’ll be around when you need to change your policy to reflect business changes.
Let’s keep your business standing no matter what tomorrow throws your way.
