Business Frauds That Can Lead to Insurance Claim Denial

Adit Bhatnagar
Oct 9, 2024
5 min read

Updated: Jul 14

Business Frauds, most common type of fraud, types of business frauds

In most cases, companies file insurance claims due to genuine risks and the need for financial assistance to recover. However, not every business is honest and sincere when submitting claims or running their business. Some companies have malicious plans when submitting insurance claims.

Insurance companies are aware of malicious and fraudulent activities. Insurance companies have their own team that investigates claims and assesses their validity. The insurance company will reject the claims if a business engages in fraud to gain from high payouts or deceive clients.

There are common business frauds that can lead to claim denial and void insurance coverage. Therefore, this article will highlight these common business frauds that insurance providers look for and reject.

Business Frauds That May Lead To Denied Insurance Claims

Non-Disclosure Fraud

When a business is purchasing an insurance policy, it must fill out a specific form with its business details. The details in the form are then used to create the policy and calculate the limit and premium.

disclosure in insurance, different types of fraud

These details include financial income, number of employees, past lawsuits, client information and more. Business fraud arises when a business or professional does not share all details honestly for a lower premium.

For example, a business may not disclose that it has been previously sued due to negligence or breach of duty. In addition, companies may claim that they earn less or have fewer employees to pay less while fulfilling their insurance requirements.

If an insurance provider discovers this business fraud, all insurance will be voided, and no claim will be accepted. The insurance company may also never provide additional insurance to the business. Insurance companies take non-disclosure fraud very seriously. According to the Hong Kong Insurance Authority, companies in Hong Kong may face a fine of HKD 25,000 or more.

Financial Fraud

Businesses are constantly seeking ways to boost their revenue and attract investments. Finance and investments are essential components of running a business. Most companies improve their financial standing by delivering the best services or products and maintaining transparency. However, some companies are not as honest with their financial practices and records.

Dishonesty in finance is called financial fraud, which is a crime. Financial fraud is when corrupt companies manipulate their financial statements, profits, investments and invoices to attract investors’ attention or trick clients.

There have been countless famous cases of financial fraud where CEOs have manipulated their accounting to gain investments and paint a ‘successful’ picture. These business fraud activities can lead to liability lawsuits and hefty legal trouble.

Most policies exclude criminal activity, and claims submitted to cover lawsuit financial loss will be denied. Insurance will not assist or cover any legal, compensation, or settlement costs related to business financial fraud. Unless it is proven that the manipulation of financial statements or invoices was purely an accident, insurance will cut ties with the company and not provide further coverage.

Asset Fraud

Business assets or property are items owned by a business that provide financial benefits or support its operations. These can include products, stock, equipment, vehicles, and more. Most companies need to insure these assets and are required to provide an inventory list to get the best coverage.

Insurance companies trust companies to provide actual value, which they then use to calculate the premium and coverage. Unfortunately, some companies input a lower amount to reduce the premium. In addition, when counting assets, employees may also put a lower value on some assets and steal them. Asset fraud can occur at any company due to employees or corrupt management.

For example, a company has 100,000 phone products in their warehouse. They discovered that insuring 100,000 phones would result in a high premium. To lower the premium, they commit asset fraud and inform insurers that they only have 40,000.

If a company claims damage or loss of assets from insurance, an investigation will be held at the warehouse and through sales statements. If it is discovered that the value submitted to the insurance firm and the actual total count differ significantly, the insurance will be void. However, if the fraud was proven due to asset theft,crime insurance may help the business cover its loss.

Like undisclosed fraud, the company will be heavily fined or sued and may be unable to cover its assets by insurance companies again.

Property Damage Fraud

Business property, from the product and warehouse to the office or store, is crucial to running a business. Companies must protect their property from damage, loss, or theft. However, accidents can occur, resulting in property damage or financial loss.

Property fire Fraud, business fraud protection, insurance fraud arson

Unfortunately, not all incidents are actually accidents. A common business fraud is property damage or loss fraud. Situations are intentionally planned to damage property to gain an insurance payout. These frauds are typically committed when a company struggles financially, and the insurance claim is the last chance of profit.

For instance, a business owner deliberately sets fire to his business to claim a million-dollar insurance reimbursement. The business owner faced imprisonment and arson charges.

There will be intense investigations when dealing with property fires, floods, or theft. When it is discovered that the damage or loss was intentional, the policyholder will be reported to the local authority and banned from every insurance provider. Every insurance claim submitted will be denied and voided.

Employee Injury Fraud

Employers in Hong Kong and many other countries are liable to pay for costs related to employee injuries at the workplace or while performing duties. The costs include medical expenses, lost salary and compensation. However, what if employees take advantage of the liability?

injury fraud, worker compensation fraud, different types of fraud

Employees may fake the results of the injuries to extend their recovery time and gain more compensation from employers. These situations are called employee injury fraud or workers’ compensation fraud. False medical representation to gain benefits is also illegal and can involve various parties.

For instance, an employee who has completely recovered after a fall at a construction site obtains fraudulent medical certificates from a doctor to maximise benefits from employers and work a second job simultaneously. In addition, in some cases, employers may also be involved in employee compensation insurance benefits.

Insurance providers will investigate the situation if there are suspicious claims. The insurance provider will demand that the employee go to the insurance doctor and get the appropriate tests to understand the injury or fraud. As a result, insurance providers will reject any workers compensation fraud claims, and legal action will be taken against the employee and the parties involved.

If the business is found to be involved in fraud, the entire insurance policy will be void, and legal actions will be taken against the company.

Why Having Insurance Is Vital To Protect a Business’s Future

Insurance is one of the most important factors in protecting a business. Companies and insurance providers must have a positive professional relationship to get the best financial assistance when things go wrong.

When a business commits fraud, its insurance will not cover it or its activities. However there are some policies that will cover risks like employee stealing from the company like money insurance and fidelity guarantee insurance

Companies will be liable for handling all their troubles and costs from their budget. Hence, it is vital to analyse your business and ensure there is no chance of fraudulent activities.

However, when a business has the proper insurance combination, it can worry just a bit less about its liability coverage when it’s just an employee or manager involved in business fraud. CEOs and founders must understand that their insurance may still cover them and the business if they are unaware of the fraudulent activity.