Even the best laid plans and the most stringent controls cannot prevent every fraud loss.
When loss does occur, where do you turn to mitigate your damages? Insurance and fidelity bonds provide a measure of recovery when losses occur; Comprehensive Personal Liabilities (CPLs) are not insurance policies, as we have covered before, and are not included in this post for that reason.
Interestingly, there is no national mandate, rule, law, or other directive which requires all settlement agents to obtain and maintain insurance. A few states have errors and omission insurance requirements and even more have very limited fidelity bond requirements (i.e. $$50,000-$150,000), but that's it. Most attorneys in the U.S. have no obligation to purchase insurance! This means that a lender can never, under any circumstances, simply assume the company or individual handling its money and documents has an insurance or a bond to cover mistakes or bad acts.
In addition to who is covered, it is important to understand what is covered and for how long. The bond and insurance worlds are unique unto themselves. Agents for insurers offer various policies and products which are filled with jargon and terminology foreign to most people. Policy coverage clauses are offset by limitations and outright omissions which, if you are not trained to decipher, may mean when an event occurs you have no legal right to file a claim and receive a recovery.
All errors and omissions and malpractice policies are "claims-based," meaning that a policy must be in effect when a claim is made, and prior coverage later canceled or suspended offers no recourse. Even more daunting for lenders who try to manage insurance verification is the typical practice of financing premium payments. This means that coverage can be bound on an initial deposit but later withdrawn and canceled when a payment is missed. Unless a lender is tracking payments, there is no way to know if coverage remains in effect.
In the past few years, due to rising cybercrime events, insurers have been making significant and material adjustments to insurance policies, carving out previously covered areas or clarifying certain exclusions to omit liability for losses from wire fraud, email hacking and cyber fraud, and even any lender representation that would involve following closing instructions as a fiduciary of the bank and not just a representative of the borrower. The high incidence of claims and loss payouts (including litigation costs) are driving these decisions.
Another phenomenon that has come to light, because insurers are charging higher premiums for anyone acting as a settlement agent for a lender, are attorneys notifying banks that in any real estate transaction they will not act for the bank, will not follow closing instructions, and will restrict all of their responsibilities to the borrower aspects of the closing. We were obliged to notify a lender just recently that an attorney to whom they were going to wire funds, send the closing package, and bind to written closing instructions, was refusing any duty to act on their behalf at the closing table.
Because the CPL offers little to no relief when a lender is victimized by fraud at a closing, as it is merely a form of limited warranty and is not insurance, it is imperative that lenders use a tool or develop a process internally that obtains, evaluates, and manages insurance and bond coverage for all settlement agents to whom it delivers a funding wire and closing package.
At Secure Insight, we verify insurance and bonds at the source of issuance, track payments and cancellations, and evaluate coverage to uncover unusual carve-outs, limitations, and omissions from coverage. This is only one of the reasons that for nearly 15 years we have successfully managed millions of loan closings without a lender loss.
