Claim Stories: How a No-Loss Letter Led to No Coverage

Each quarter, US Assure SVP - Head of Product Underwriting Rachele Holden joins us in the studio to share real builders risk claims stories and provides guidance to help you and your clients prevent similar mishaps.

Read the Video Transcript:

Tell us about this project.

This is a large commercial building that was going to be renovated. It was covering renovations only for a $9.5 million renovation project.

Why was timing so important in this situation?

The policy canceled for nonpayment of premium. At the time, the agent called us and asked us for a reinstatement of the policy.

The underwriter looks at it. They make an exception. So, what they agreed to is we'll reinstate if we get payment and the insured provides a signature on a no loss letter. It was done.

What happened to result in a claim?

About a month later after we reinstated the policy, a claim comes in. It is water damage. It was from faulty workmanship on some plumbing work. 

What did the adjuster uncover?

About a month later after we reinstated the policy, a claim comes in. It is water damage. It was from faulty workmanship on some plumbing work. 

What did the adjuster uncover?

The adjuster starts digging into the claim and finds the no loss letter. Well, the no loss letter has date ranges, from the date of the cancellation to the date that was requested for the reinstatement. Well, during that grace period, was this actual water loss.

There's a problem.

The adjuster is now looking at a no loss letter where the insured swore there had not been any known losses. This insured had listed very detailed in a spreadsheet with cost broken down by vendor of every step of the work that was performed to mitigate and stop the water damage.

Well, clearly now the document we received shows the insured knew about the loss. Had we known about this loss ahead of time, we would not have reinstated the policy.

How did Zurich respond to the claim?

Zurich has to make a decision. Are they going to rescind the reinstatement because the reinstatement was granted without having the knowledge of the loss?

And after review, Zurich decided to rescind the reinstatement. The policy was back to the cancellation effective date and no coverage for this claim.

But I want to explain where the insured came from. His point of view.

They had turned a claim in to to the contractor's general liability that caused the plumbing leak. The fitting wasn't put on properly. It caused a lot of water damage all the way down. All three stories.

They thought their liability insurance was going to cover the loss. Which, as they explained to the adjuster, is why they signed the no loss letter.

It was innocent. They had no intent to show coverage was to be picked up under our Zurich builders risk policy.

Unfortunately, the general liability carrier for that plumber came back and declined to pay. The insured had no choice but to turn a claim in.

Now, had we known about this claim and it had not been settled, we would not have been able to reinstate. So, we would not have been able to backdate and cover the loss at all.

But based on what we saw on the spreadsheet that the adjuster gave us, they did an excellent job of mitigating. So, I would have been having no problem to have extended that policy by doing a rewrite.

What did the agent get right?

The agent requested a reinstatement in a timely manner — because the reinstatements are only valid within 30 days of the notice of cancellation.They asked the insured to sign a no loss letter. We received our payment. The no loss letter had the correct time period listed: from the time the policy had been cancelled to the time the agent requested reinstatement.

That was all done right. We also got a signed application. The agent printed the application for our commercial app that they did online and actually got a signature on it. So, I was very proud of the agent for getting that signature as well.

What should have been done differently?

Had the payment come in on time. We wouldn't have an issue today, right. Because what would have happened is they could have turned the claim in on Zurich's policy. We would have paid. We would have then looked to attempt to get it from the subcontractor for reimbursement and let the carrier handle all that information, but they would have had a claim paid.

When your office gets these notices of cancellation, contact your insured. Tell them to pay before that cancellation effective date. Then we wouldn't have an issue with a claim occurring because there is a grace period on that notice.

Agents should always question the insured before they sign the no loss letter. Go through the dates. It's always going to be the date the policy cancelled and we're asking for a current date to be signed during that grace period.

Check with them. "OK, there have been no losses. Whether you're trying to claim it with a sub’s liability or not. No losses have occurred during this policy period."

Zurich has the right to know if a loss has occurred. And until that loss is paid by another carrier's policy, there is a potential for the present carrier to be responsible for coverage. So you've got to alert every time that there's a possible claim.

Final thoughts?

This claim is a good reminder to make sure that you get signed applications to validate the information, values, terms, what they're doing.That's what this application does. But it also is making sure they understand what consequences can occur if the insured doesn't provide payment on time. And then if they didn't get it paid, when a notice of cancellation is issued, make sure they understand the importance of getting it paid during the grace period. Payment must be received prior to that notice of cancellations effective date because once it's effective, then we're talking about a no loss letter.

And on the no loss letter, it has to validate accurate information that no loss has occurred. Whether it is covered or not covered, you're attempting to get it from a subcontractor's liability because it's their fault, it doesn't matter.

A claim has occurred. It doesn't matter, like on this case, that it was an excellent insured. They did everything they could to mitigate the damage. But what they didn't do was pay their premium on time and we wouldn't be in this position.

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The description of the Builders Risk Plan insured by Zurich is only a summary of available coverages. The terms, conditions, provisions, limitations, and exclusions of the actual policy as issued will dictate the scope of coverage in the event of a claim.