Running for Cover: Important Insurance Issues for Mortgage Loan Brokers

By Randy M. Hess and Nicole Adams-Hess, Adleson, Hess & Kelly
California Mortgage Association, Points of Interest, Summer 2014

This article focuses on policies that mortgage loan brokers are advised to obtain, and certain coverage problems frequently found in those policies.

General Coverage lssues - A Checklist

  1. Select an insurance broker who understands your business, and has access to a number of markets that provide coverage to mortgage loan brokers.
  2. Select an insurer with good ratings and reputation. Check AM Best Co. for the rating, size and outlook. Anything below an A- or "negative outlook" should be avoided. Talk to knowledgeable coverage attorneys to determine which insurers should be avoided due to their Poor claims handling.
  3. Select the correct limit. Generally, determining the limits is based on the amounts of the insured's assets that need to be protected, as well as the risk and exposure the insured faces. Unless you specifically tell the insurance agent (in writing) that they are undertaking to independently advise you on specific limits, the insurance agents generally will escape liability if there are inadequate limits.
  4. Take a look at the deductible (or retention) and see what risks You are entitled to shoulder yourself, as well as what reductions in premium results from increasing the deductible.
  5. Check exclusions. Typically, exclusions such as "subprime exclusions" or servicing exclusions, may remove all coverage from your policy.
  6. Make sure your entity is correctly named. lf you operate businesses with more than one entity or fund, discuss with your agent and counsel listing all owned entities and funds listed on the policy. Unfortunately, insurers take the position, even if unreasonable, if an entity is mísnamed, or if the entity form is incorrectly labeled, that there is no coverage.
  7. Make sure that you report claims timely. Most errors and omissions, employment practices and directors and liability policies, as well as mortgage bonds, require reporting either priortothe policy expiring or within thirty, sixty or ninety days thereafter, depending on the policy form. Some policies require reporting within sixty days after you receive notice of claim. Remember that the Policy expires one minute after midnight on the date reflected on the declarations page of the policy so you must report claims on these types of policies one day prior to the expiration date shown on the policy.
  8. Pay attention to the application. Previous claims and circumstances that may lead to claims should be disclosed. Make sure that all claims or notice of circumstances of claims are reported to your current insurer prior to expiration of the policy.
  9. lf you intend to sell your business or retire, you should discuss with coverage counsel and with your insurance agent obtaining "tail coverage" that provides coverage for claims made in the future for acts performed prior to retirement.

lnsurance That Mortgage Loan Brokers Should Strongly Consider Obtaining

  1. Mortgage Bankers Bond insurance is insurance that provides specific coverage for claims relating to failure to maintain insurance, errors when reporting to the FHA or VA, losses due to errors or omissions regarding payment of real estate taxes or inadequacy of insurance, certain crime and dishonesty coverage, forged check coverage, and at times limited directors and officers coverage and limited errors and omissions coverage. Typically, the coverage provided underthese bonds for D&O and E&O coverage is very limited and should not be relied upon to be providing full coverage in these areas. These bonds vary and some policies provide broader coverage and some policies provide more limited coverage.
  2. Commercial General Liability policies (CGL) cover everything from accidently caused bodily injury or property damage claims to personal injury coverage and advertising injury coverage. Personal injury coverage typically covers libel, slander, invasion of privacy, wrongful eviction and other matters. Make sure that your general liability policy contains personal injury and advertising injury coverage.
  3. Umbrella coverage. We strongly advise our clients to obtain umbrella liability policies both for their business and homeowners policies. Umbrella policies frequently provide broader coverage than the underlying commercial general liability and homeowners policies, as well as providing additional limits, usually a minimum of another 51,000,000.00 of coverage. Make sure your umbrella covers all of your policies, including your auto, commercial general liability, rental policies, etc. All your underlying policies need to be listed on the umbrella policy. Also, make sure that there are no gaps in coverage between your primary policy and the umbrella policy. For your uninsured motorists coverage, make sure the umbrella provides additional limits as well.
  4. Workers Compensation policy - if you have employees, this is required by law.
  5. Employment Practices Liability policies. Again, if you have employees, while not required by law, as employment claims by employees have increased substantially, EPLI policies should be obtained. Typically, these policies are designed to cover claims of wrongfultermination, harassment, and discrimination. These policies also may provide coverage for third party claims, including claims by customers, clients, or tenants of discrimination or harassment.
  6. Employment Benefits Liability policies. This is a policy which typically is obtained for a very reasonable cost that covers errors and omissions and the administration of employment benefit policies.
  7. Forced Place/REO coverage. These policies are typ¡cally available to cover properties where the borrower fails to continue their property insurance.
  8. Directors and Officers policies. These policies typically cover errors, omissions and misstatements made by directors and officers and certain employees. They can provide broad coverage, and at times can provide coverage for certain securities claims, depending on the policy form.
  9. Cyber/Privacy claim coverage is available providing coverage for such things as claims of theft of private information, payments to reconstruct data and loss of confidential customer information.
  10. Automobile coverage/non-owned coverage is extremely important. Make sure that your policy contains "nonowned" coverage, which can usually be obtained for a very small amount. This coverage provides coverage for vehicles that the insured does not own, but are used on behalf of the insured. lt is critical that this coverage be obtained.

Conclusion
Obtaining these policies, with the proper limits and deductibles, must also be balanced with the cost. Additionally, policies may be issued that unfortunately provide little or no coverage to insureds due to exclusions, misnaming of the entity or the name of the business, failure to include affiliates, or incorrect descriptions as to the type of work the insured performs. Make sure you receive a copy of the policy and upon renewal, obtain a "specimen policy" so you know what you are purchasing. Ask your insurance agent in writing at renewal what changes in the policy, if any, are being made. Make sure that you timely report claims and always calendar on claims made policies,
such as errors and omissions policies, the last date to report claims prior to the policy expiring. Remember that most policies expire at 12:01 a.m. on the date listed, so be sure to calendar the date before the printed"expiration date" to avoid late reporting. lnsurance coverage should be obtained to secure peace of mind. However, a very high level of care needs to be taken to select proper coverage and to pursue coverage for claims.

Randy M. Hess is a shareholder with Adleson, Hess & Kelly, PC in Campbell, where his practice focuses on representing policyholders in insurance coverage and bad faith disputes. His clients include Fortune 100 companies,
governmental entities, individuals and nonprofits. Mr. Hess has written articles on insurance coverage for numerous publications. Nicole S. Adams-Hess, Esq. is a litigation associate with Adleson, Hess & Kelly, pC. Ms. Adams-Hess represents policyholders in insurance coverage and bad faith disputes.