MBIG Quick Tip - Fall 2010

Confused By Your Firm's Insurance Coverages (and unsure of what you should carry)?

I don't blame you. Pouring over your policies and their legalistic wording can be daunting, which is why most people don't know important details about their insurance, such as what losses are not covered under their policies, when is a potential loss considered a claim and when must it be reported. But, not understanding details like these can turn into huge problems. In fact, take claim reporting for example. Most policies have specific reporting deadlines. Notify the carrier too late, and an otherwise covered claim may be denied forcing you to pay for your entire loss out of pocket.

With this in mind, I've put together an outline of 4 common insurance policies purchased by mortgage bankers and brokers and the typical coverages and conditions of these policies (Mortgage Bankers Bonds, Professional Liability Insurance, Directors & Officers Liability Insurance, Employment Practices Liability Insurance). This overview will provide a good starting point for understanding these policies and how to ensure you take advantage of the benefits they offer. Of course, keep in mind that for a specific insurance coverage the requirements may vary from carrier to carrier. So, it's best to read yours or seek out the advice of a qualified insurance broker.

Mortgage Bankers Bonds (Fidelity Insurance and Mortgage E&O)

What is this insurance?
There are usually two main parts to a mortgage bankers bond: Fidelity (also known as Employee Dishonesty) and Mortgage Errors & Omissions. Fidelity protects you from employee fraud or theft and may be extended to include fraud by closing agents, third party originators and others. Mortgage E&O protects you or your investors from losses due to specific “mistakes” by your firm (i.e. errors and omissions) and your liability to mortgagors and investors. These policies often limit coverage for such “mistakes” as failure to arrange insurance on a mortgagor’s property for Fire & Extended Coverage, Homeowners Insurance or Flood Insurance as well as failure to pay real estate taxes, make a flood zone determination or obtain or maintain FHA Insurance, VA Guaranty or PMI.
Mortgage Bankers Bonds can also be extended to include crime coverage, which can be written to cover losses stemming from: borrower fraud or forgery, theft of investors’ funds, stolen money, equipment or documents from your office, computer crime and other instances of crime, robbery and burglary.

What losses will the insurance company pay for?
Because Mortgage Bankers Bonds can be written to include such a wide range of losses, it’s best to check your policy to see what specific monetary, document or property losses are covered. For instance, firms often mistakenly believe that mortgage bankers bonds cover all cases of fraud. Not so. The fidelity portion will typically only cover losses in which an employee is acting alone or in collusion with others. Generally, the carrier will reimburse you for a covered loss (up to your limit, minus your deductible). Or, they’ll make payments jointly to you and any loss payees such as investors and/or warehouse lenders to whom, under the policy, insurance proceeds are to be paid in the event of loss. Expenses, such as legal fees for court proceedings and accounting fees for determining the extent of the loss, are generally covered as well. In cases of fraud and theft, the carrier may want to go after the perpetrators in court to see if they can recover some of the loss.

What is considered a claim?
You have a claim at the point when you “discover the loss.” While your policy may describe this concept in some detail, it basically translates to “the moment you realize a covered loss may have occurred.” This could include realizing an employee has defrauded you, a demand letter from an investor, being notified of a suit brought against you, etc.

When do you need to notify your insurance carrier of a potential claim?Report the claim as soon as possible. Most policies will require notice within a specific number of days. It could be within 60 days of discovery. It could be less. Check your policy. You will also need to provide “proof of loss” to the insurance carrier, most likely, within 6 months after the discovery is made. For proof of loss, you’ll need to provide a write-up explaining the particulars as well as any pertinent documents and an itemization of the amount lost. The six-month time period gives you, as well as outside investigators and accountants (whose fees are likely covered as a claim expense), the time needed to determine the full extent of the loss.

Professional Liability Insurance

What is this insurance?
Think of this coverage as business malpractice insurance for the professional services you offer. The insurance protects your firm from lawsuits resulting from mistakes made during origination, underwriting, processing, marketing, closing, warehousing, servicing and other professional roles. These lawsuits will generally be brought against you by clients accusing you of negligence in the performance of your professional duties. Though typically, the types of errors & omissions mentioned in the Mortgage E&O section above are specifically excluded under professional liability.

What losses will the insurance company pay for?
Most policies cover damages and claim expenses (up to your limit, minus your deductible). Damages include any amount you’re legally required to pay as a result of an arbitration hearing or court decision (i.e. you were sued and lost). The coverage also tends to include settlements, though the insurance company will need to approve the deal. In addition, the policy will detail what is not considered part of the coverable loss. This can include civil or criminal fines, taxes owed by any party and punitive damages.

Claim expenses—which can be thought of as legal fees—are any costs resulting from attorneys and others as a result of the investigation, defense, negotiation and appeal of a claim. Insurance companies will want to hire, or at least approve, any lawyers hired to handle your case and will not reimburse you for any fees you’ve incurred by hiring your own attorney without their written consent. These expenses are generally part of the overall policy limit.

What is considered a claim?
Taking into consideration what’s covered by the policy, a claim is typically any demand for money or services, a lawsuit or the initiation of a disciplinary proceeding against you by a regulatory board, agency or equivalent government entity.

So, again, it’s the “initiation” of proceedings against you that constitute a claim, not the decision rendered against you. Insurance carriers want to be involved from the beginning, so they can protect their own interests by hiring legal counsel they trust and handling the case in the manner they see fit.

When do you need to notify your insurance carrier of a potential claim?
As soon as possible. But, generally, no later than 60 days after a claim is made against you or late notification may impact your claim. Your policy may also ask you to report any circumstances that you are aware of that could lead to a claim arising.

Directors & Officers Liability Insurance (D&O)

What is this insurance?
D&O coverage protects the personal assets of directors and officers of your firm from lawsuits alleging negligence in the performance of their roles as leaders and decision makers. The coverage may also extend to your corporate entity. In this way, these policies can be thought of as management liability for your corporate executives and are applicable for both publicly-traded and privately-held companies. These policies are beneficial in protecting you from a wide-range of suits. For instance, minority shareholders might bring a suit against the majority shareholders for what they believe to be arbitrary and poor decisions. Competitors might allege infringement of trade secrets or some other type of unfair competition. Governmental or regulatory agencies might target your directors for allegedly failing to comply with laws and/or regulations, including securities violations. And, investors and warehouse lenders might assert you misrepresented your company or were guilty of breach of contract. D&O policies usually specifically exclude those losses that would normally be covered under a separate Professional Liability policy as outlined above.

What losses will the insurance company pay for?
Covered losses often include damages, legal judgments against you, settlements, defense costs and pre- and post-judgment interest. As per usual, the carrier will pay up to your limit minus your deductible.

These policies are often careful to state that the covered loss does not include such expenses as: civil or criminal fines, taxes (though some insurance companies may pay for your share of payroll taxes owed on back pay) and costs incurred to make a building more handicap accessible.

What is considered a claim?
There are a number of circumstances that constitute a claim, though they can generally be summed up as your receipt of demand (written or sometimes even oral notice) that a case is going to be brought against a director or officer of the firm (or the firm itself). So, if you receive a complaint that includes a demand for money or services, that’s most likely considered a claim. Also, included is the receipt of any document notifying you that you’re to be the defendant in a civil, criminal, administrative or arbitration proceeding. An indictment or the filing of a notice of charges may also be a claim. Lastly, if you are notified charges are being brought against you in front of a federal, state or local government agency then… you guessed it… you may have a claim.

When do you need to notify your insurance carrier of a potential claim?Depending on your policy, you’ll need to contact your carrier anywhere from 30 to 90 days after you receive notification that a claim is being made against you. Though one such policy I’ve worked with gives a mere 15 days to report a lawsuit to the carrier. Also, keep an eye on when you’re policy ends. If you’re near the end of your policy period, the reporting option may expire when the policy expires even if it’s within the requisite number of days. As with Professional Liability, you should also notify the carrier of any circumstances that you think might lead to a claim.

Employment Practices Liability Claim Insurance (EPLI)

What is this insurance?
EPLI can protect your firm, its management and its employees from a wide range of employment-related lawsuits brought against you by current employees, past employees and job applicants that allege you committed illegal employment practices. The policies can even be extended to cover actions by 3rd parties against you, such as vendors or customers. Depending on your policy, the suits covered could include: age, sex, racial, disability or religious discrimination, sexual harassment and wrongful dismissal, discipline or evaluation. EPLI can be offered as part of D&O Liability Insurance, or it can be written as a separate policy.

What losses will the insurance company pay for?
Just as with D&O, covered losses often include damages, legal judgments against you, settlements, defense costs, and pre- and post-judgment interest. (See the above D&O discussion for examples of expenses not included as covered losses.) Payouts would be up to your limit minus your deductible.

What is considered a claim?
Again, because the two policies are closely related and often paired together, the definition of what circumstances constitute a claim is similar to that given for D&O. See the above D&O discussion for a full explanation, but a general definition of a claim is your receipt of written notice that some type of employment-related court, arbitration or government agency case is going to be brought against your firm.

When do you need to notify your insurance carrier of a potential claim?
While D&O and EPLI have similar definitions of a claim, the reporting requirements can greatly vary. With D&O, it’s the receipt of demand that marks the beginning of your reporting window. With EPLI, it’s actually the point at which you’re aware of the issue that could lead to a claim and have begun to investigate it. The policy may give you 60 days or as little as 30 to notify the carrier. This isn’t much time. So, if you wait all the way until the actual demand is made, you may miss your reporting window.

Insurance For Your Peace Of Mind

Contrary to what most people think, insurance is not a simple commodity. The same type of insurance coverage, i.e. E&O, can vary widely from carrier to carrier. To get the most out of your insurance, you need to know what it is you’re buying and what requirements you’re expected to follow in the event of a potential claim. Equally important to the policy wording is the carrier. Choose a high quality carrier and you’ll be more likely to avoid some of the hassles while benefiting from helpful service and quick response to questions, concerns and claims.

 

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