The exact query is not clear from the original post so these are just general views.
There seem to be two separate questions; the claim and the policy terms.
CLAIM.
In relation to the claim it seems that the dispute turns on a matter of interpretation. If there is ambiguity in the contract wording that should be resolved in your favour. This is based on a principle known as the contra proferentem rule. In short, the contra proferentem rule provides that contractual ambiguities [in terms of the wording] are construed against the party that drafted the document. In this case the rule should apply against the insurer if you can establish the ambiguity on the facts.
By the way, many insurance contracts provide, or even mandate, that disputes should be resolved by arbitration. I am curious as to why the insurers did not insist on arbitration.
In relation to the F.S.O.B. be sure that you have registered the contra proferentem argument with them. If not, you might supplement your submission accordingly.
POLICY TERMS.
As far as the second issue of restrictive cover goes it must be remembered that most insurance contracts are only annual contracts. Although you retain the same policy number and so on the contract is only an annual one. In other words each renewal is a new contract. That is how insurance underwriters can vary their terms and conditions from year to year.
I see that your policy has expired.
Please be aware that if you have taken out insurance with a new company the facts that you have had a claim repudiated and restrictive terms imposed on you constitute material facts and those matters should be disclosed to your new insurers at proposal stage. Failure to do so could constitute non-disclosure of material facts and lead to your policy being voided. If you were unlucky to have a claim with a new insurer it could be avoided for the same reason.
For technical interest, a material fact is one that could influence a prudent insurance underwriter in deciding whether or not to accept a risk proposed for insurance and if so upon what terms and conditions.