Insurance Claim That Was Denied Because Nobody Read the Policy

The CFO of a Caribbean manufacturing company had managed the company’s insurance programme for eleven years. Each year, the process was the same: the insurance broker called in November, proposed a renewal with modest premium adjustments, the CFO approved the renewal, and the certificates of insurance were filed. The CFO had never read the full policy wording. The broker had never conducted a comprehensive review of the company’s risk profile against the policy coverage. And the company’s board had never discussed insurance as a component of risk management.

In August, the company’s primary production line experienced a catastrophic failure. The main compressor unit in the climate-controlled manufacturing facility seized, causing a cascading mechanical failure across the production line’s drive system. The failure was not caused by an external event — no hurricane, no flood, no fire. It was a mechanical breakdown resulting from metal fatigue in a component that had been operating beyond its recommended service life.

The production line was offline for twenty-three days while the compressor was replaced and the drive system was rebuilt. The direct cost of the repairs was approximately US$340,000. But the consequential cost was far greater: the company was unable to fulfil approximately US$1.2 million in customer orders during the twenty-three-day shutdown. Two export contracts that required delivery within specified windows were forfeited, and the company incurred penalty charges of approximately US$180,000 for late delivery on three other contracts.

The CFO submitted an insurance claim for the equipment damage, the repair costs, and the business interruption losses. The insurer’s response arrived four weeks later. The equipment damage claim was denied. The company’s property insurance policy was a named perils policy that covered fire, lightning, explosion, storm, flood, earthquake, impact, theft, and malicious damage. Mechanical breakdown was not a named peril. The insurer noted that mechanical breakdown coverage was available as a separate policy or as an endorsement to the property policy, but that neither had been purchased.

The business interruption claim was also denied. The company’s business interruption coverage was triggered only by an insured property loss. Since the mechanical breakdown was not an insured peril under the property policy, the resulting business interruption was not covered. The policy’s business interruption section was explicitly linked to the property section: if the underlying property event was not covered, the consequential business interruption was not covered either.

The CFO’s total uninsured loss: approximately US$1.72 million. The annual premium for the mechanical breakdown coverage that would have covered both the equipment damage and the triggered business interruption would have been approximately US$18,000.

The CFO’s meeting with the board was one of the most uncomfortable of her career. The board chairman’s question was simple and devastating: “We pay approximately US$320,000 per year in insurance premiums. We have just suffered a US$1.72 million uninsured loss. How is it possible that we are paying this much for insurance and are not covered for a risk as foreseeable as a mechanical breakdown in a manufacturing facility?”

The answer was that nobody had asked. The insurance programme had been renewed annually on the same basis for over a decade without any party — the CFO, the broker, or the board — conducting a systematic assessment of whether the coverage matched the company’s actual risk profile. The mechanical breakdown gap was the most consequential gap, but the subsequent review that the board commissioned revealed others: business interruption coverage limited to twelve months when the company’s recovery from a major event would likely require eighteen; no coverage for supply chain interruption caused by supplier failure; no cyber insurance despite the company’s increasing dependence on digital systems; and a property valuation in the policy that was approximately thirty per cent below the current replacement cost of the company’s assets.

This fictional scenario, while not attributable to any specific Caribbean manufacturer, reflects a pattern Dawgen Global encounters repeatedly: Caribbean enterprises that pay substantial insurance premiums while carrying significant uninsured exposures because nobody has systematically aligned the insurance programme with the enterprise’s actual risk profile.

Insurance Is a Risk Management Tool, Not an Administrative Function

The fundamental problem in the opening scenario was not the insurance policy. It was the enterprise’s approach to insurance. Insurance was treated as an administrative function — a renewal exercise managed by the CFO and the broker — rather than as a risk management tool that should be governed, reviewed, and aligned with the enterprise’s risk management framework.

Insurance Within the ERM Framework: Article 2 of this series described the enterprise risk management framework that identifies, assesses, and manages the risks facing the enterprise. Insurance is one of the risk treatment options available for the risks identified in that framework. Risks can be avoided, mitigated through controls, transferred to a third party (including through insurance), or accepted. The decision about which risks to insure and which to retain should be made within the ERM framework, based on the enterprise’s risk appetite, the cost of insurance relative to the potential loss, and the availability and adequacy of other risk treatments. When insurance is managed outside the ERM framework — as it was in the manufacturing company — the result is a coverage programme that reflects historical purchasing patterns rather than current risk exposure.

The Broker’s Role and Its Limitations: Caribbean enterprises typically rely on their insurance broker to advise on coverage. Competent brokers provide valuable guidance, but the broker’s incentives and perspective are not identical to the enterprise’s. The broker facilitates the transaction between the enterprise and the insurer; the broker does not conduct the enterprise’s risk assessment. The enterprise must take responsibility for ensuring that the broker understands the full scope of its risk profile and that the coverage the broker places is adequate for the risks the enterprise faces. The manufacturing company’s broker had renewed the same programme annually because the CFO had not communicated changes in the company’s risk profile — and the broker had not proactively assessed them.

Five Insurance Gaps Caribbean Enterprises Commonly Carry

Business Interruption Inadequacy: Business interruption insurance is designed to replace the income the enterprise loses when an insured event disrupts its operations. But Caribbean enterprises frequently carry business interruption coverage that is inadequate in scope, duration, or amount. Coverage may be limited to a shorter indemnity period than the enterprise would actually require to recover from a major event. Coverage may be triggered only by physical damage at the enterprise’s own premises, excluding disruption caused by events elsewhere — a port closure, a utility failure, or a supplier’s loss. And coverage amounts may be based on outdated revenue figures that do not reflect the enterprise’s current operations. The food manufacturer in Article 1 of this series discovered that its insurance policy did not include business interruption coverage at all — the most fundamental gap.

Property Undervaluation: Caribbean enterprises frequently insure their property at values that are significantly below current replacement cost. This undervaluation may result from asset values that have not been updated for construction cost inflation, from improvements and additions that have not been reported to the insurer, or from the deliberate underinsurance that some enterprises practise to reduce premiums. When a loss occurs and the property is underinsured, the enterprise discovers the average clause — the insurance principle that reduces the claim payment proportionately when the insured value is less than the actual value. The manufacturing company’s property valuation was thirty per cent below replacement cost, meaning that even for covered perils the enterprise would recover only a fraction of its actual loss.

Exclusion Blindness: Every insurance policy contains exclusions — the events, circumstances, and types of loss that the policy does not cover. Caribbean enterprises that do not read and understand their policy exclusions carry risks they believe are insured but are not. The mechanical breakdown exclusion that denied the manufacturing company’s claim is common in named perils property policies. Other exclusions that frequently surprise Caribbean enterprises include gradual deterioration, corrosion, wear and tear, faulty design or workmanship, government action, cyber-related losses, and pandemic-related business interruption. Understanding the exclusions is as important as understanding the coverage.

Missing Coverage Lines: Caribbean enterprises frequently lack entire categories of coverage that their risk profile requires. Cyber insurance is the most prominent current gap — many Caribbean enterprises have not purchased cyber coverage despite increasing dependence on digital systems and increasing exposure to cyber events. Directors and officers liability insurance is absent from many Caribbean enterprises, leaving directors personally exposed to claims arising from their governance decisions. Professional indemnity insurance may be inadequate or absent for professional services firms. And product liability coverage may be insufficient for enterprises whose products are sold internationally.

Supply Chain and Contingent Business Interruption: Standard business interruption coverage typically responds only to events that physically damage the enterprise’s own premises. It does not cover the business interruption caused by events affecting the enterprise’s suppliers, customers, or infrastructure providers. Article 5 of this series documented the catastrophic supply chain disruption that the pharmaceutical distributor experienced — disruption that standard business interruption coverage would not have addressed. Contingent business interruption or supply chain interruption coverage extends the protection to events that occur elsewhere in the enterprise’s supply chain, but this coverage must be specifically requested and is not included in standard policies.

The Insurance Programme Review: What It Should Cover

Risk Profile to Coverage Mapping: The review should map the enterprise’s current risk profile — drawn from the risk register developed under the ERM framework — against the existing insurance coverage. For each material risk, the review should determine whether insurance coverage exists, whether the coverage is adequate in scope, amount, and duration, and whether any exclusions or conditions limit the coverage in ways that the enterprise has not anticipated.

Property and Asset Valuation: The review should verify that all insured property is valued at current replacement cost. Valuations should be conducted by qualified professionals and should include buildings, plant and equipment, inventory, and the cost of business interruption. Undervaluation is the silent gap that reduces every claim payment for every loss — it is the most financially consequential gap to close.

Business Interruption Adequacy: The review should assess whether the business interruption coverage reflects the enterprise’s current revenue, its realistic recovery timelines, and the full range of events that could disrupt its operations. The indemnity period should be sufficient for the enterprise to recover from the most severe plausible disruption. The coverage trigger should be evaluated to determine whether it captures the disruption scenarios that the enterprise’s risk assessment has identified as most significant.

Exclusion and Condition Review: The review should identify every exclusion and condition in the enterprise’s policies and assess whether any exclusion creates an uninsured exposure that the enterprise has not consciously accepted. Exclusions are not inherently problematic — some excluded risks are better managed through prevention and controls than through insurance. But the enterprise should be aware of every exclusion and should make a deliberate decision about whether the excluded risk is accepted, mitigated through other means, or addressed through additional coverage.

Emerging Risk Coverage: The review should assess whether the enterprise’s insurance programme addresses emerging risks: cyber risk, climate-related risk, regulatory risk, reputation risk, and the evolving risk landscape that the enterprise’s risk assessment identifies. Insurance markets are developing products for many of these emerging risks, and the enterprise’s broker should be able to identify the available coverage options.

Claims History and Loss Analysis: The review should analyse the enterprise’s claims history and near-miss events to identify patterns that may indicate inadequate coverage, inadequate risk management, or both. A pattern of claims in a particular area may suggest that the underlying risk management controls need strengthening; a pattern of denied claims may suggest that the coverage programme has gaps that need to be closed.

Integrating Insurance into Governance

Board Oversight of Insurance: The board — or the audit and risk committee — should include insurance programme adequacy in its risk oversight. The board should receive an annual report on the enterprise’s insurance programme that summarises the coverage, identifies the known gaps, and confirms that the programme is aligned with the enterprise’s risk profile and risk appetite. The manufacturing company’s board had never discussed insurance — an oversight gap that contributed directly to the US$1.72 million uninsured loss.

Annual Insurance Programme Review: The enterprise should conduct a formal insurance programme review at least annually, and more frequently when the enterprise’s risk profile changes materially. The review should be led by the risk management function (or the CFO in enterprises without a dedicated risk function) and should involve the insurance broker, relevant operational management, and, for significant programmes, independent insurance advisory support.

Insurance Procurement Discipline: Insurance renewal should not be a passive exercise in which last year’s programme is rolled forward with premium adjustments. Each renewal should be an active assessment of whether the coverage programme remains appropriate for the enterprise’s current risk profile. The enterprise should provide the broker with updated information on asset values, revenue, operations, and risk management activities, and should require the broker to confirm that the programme addresses the enterprise’s identified risks.

Dawgen Global’s Insurance Risk Advisory

Dawgen Global’s Insurance Risk Advisory helps Caribbean enterprises ensure that their insurance programmes are aligned with their actual risk profiles and integrated into their enterprise risk management frameworks.

Insurance Programme Review: Dawgen Global conducts comprehensive insurance programme reviews that map the enterprise’s risk profile against its existing coverage, identify gaps, and produce a prioritised recommendation for programme improvement. Our reviews are independent of the insurance broker, providing the enterprise with an objective assessment of coverage adequacy.

Property and Business Interruption Valuation Advisory: Dawgen Global advises on property valuation methodology and business interruption calculation, ensuring that the enterprise’s insured values reflect current replacement costs and that business interruption coverage is calibrated to realistic recovery scenarios.

Insurance Governance Framework: Dawgen Global designs insurance governance frameworks that integrate insurance into the enterprise’s broader risk management structure: board reporting, annual review processes, renewal discipline, and the ongoing monitoring that ensures the insurance programme remains current as the enterprise’s risk profile evolves.

Claims Management Advisory: Dawgen Global provides advisory support for significant insurance claims, helping enterprises navigate the claims process, prepare claim documentation, and maximise recovery within the terms of the policy.

Broker Performance Assessment: Dawgen Global assesses the performance of the enterprise’s insurance broker, evaluating the quality of advice, the competitiveness of the placement, and the broker’s proactiveness in identifying emerging coverage needs.

The Premium You Pay and the Protection You Get

The fictional manufacturer that paid US$320,000 per year in insurance premiums and suffered a US$1.72 million uninsured loss was not underinsured because insurance was unavailable. It was underinsured because nobody had aligned what the enterprise was buying with what the enterprise needed. The mechanical breakdown coverage that would have covered the loss cost US$18,000 per year — less than six per cent of the total premium the enterprise was already paying. The gap existed not because of cost but because of inattention.

Caribbean enterprises collectively spend millions of dollars annually on insurance premiums. The question that every board, every CFO, and every risk manager should ask is not “are we insured?” but “are we insured for the risks that actually threaten our enterprise?” The answer to the first question is almost always yes. The answer to the second question, as the manufacturing company discovered, is often no — and the difference between the two answers can be measured in millions.

Insurance is not a commodity to be purchased at the lowest price. It is a risk management tool whose value is determined not by what it costs but by what it covers when the enterprise needs it most. The enterprise that reviews its insurance programme annually, aligns it with its risk profile, and governs it as a component of enterprise risk management is an enterprise that will recover from adversity. The enterprise that renews last year’s programme without examination is an enterprise that is paying for protection it may not have.

Review Your Insurance Programme

Dawgen Global invites Caribbean enterprises to review their insurance programmes against their actual risk profiles.

Request a proposal for Dawgen Global’s Insurance Programme Review and Risk Advisory. Email [email protected] or visit www.dawgen.global to begin the conversation.

DAWGEN GLOBAL | Big Firm Capabilities. Caribbean Understanding.

Request a proposal for Dawgen Global’s Insurance Programme Review and Risk Advisory.

Email: [email protected]

Web: www.dawgen.global

About Dawgen Global