The guidelines for this type of case can differ from state to state and insurance company to insurance company. It is likely the claim was accepted on the basis that the insurance company was covering the damages from vehicle being stolen but then denied it when more information came to them, including that keys were found in the ignition.

It is probable that your insurance policy has an exclusion to paying claims on stolen vehicles under certain circumstances. Failing to exercise reasonable care in safeguarding the car might be a clause in your policy that allows them to exclude stolen car claims if keys were left in the ignition. This would allow them to deny the claim once they find out that the policy was breached in this way, even if work was started on the car. I suggest calling your insurance company and finding out the exact reason the claim was denied.

If you believe the claim should not be denied or that you are being treated unfairly there are state insurance regulatory bodies in each state that you can contact to find out your full rights.