When a Closing Attorney’s E&O Policy is not Actually Insurance and Why a Lender Should Care
If you are merely collecting a “Certificate of Coverage” on behalf of a closing attorney and passing them through your loan process as meeting your internal risk management protocols you may be in for an unpleasant surprise if a claim arises.
At Secure Insight we do more than collect insurance certificates, we review policies and validate coverage and payment directly at the source: the insurance agency or insurer where the policy originated. We ask important questions about the validity and extend of coverage, and exclusions, because in the event of an incident a lender needs to know they can offset risk by filing a claim that will be processed and paid under a valid policy of insurance.
Recently we have discovered a rise in offshore, low cost risk-shared E&O coverage plans. These companies and policies are designed to exploit the high cost nature of E&O for real estate attorneys and other professionals by offering ridiculously low fees for coverage. Notice I said “coverage” and “fees” and not “insurance” and “premiums.” That is because these policies are not traditional insurance and are likely not worth the paper on which they are written.
Risk sharing groups in the E&O space are based upon the concept of cooperative pooled risk arrangements. The idea, which has found success in the health insurance area, relies upon the pooling of all plan participant fees to cover expected losses from claims. The problems with this arrangement in the E&O space are numerous.
First, the plan is not an insurance product, and therefore is not governed by insurance laws or regulators. It is not filed or supervised in the United States. Second, the companies arranging these risk sharing pools are inevitably based outside the legal jurisdiction of the United States making the enforcement of any lawful claim highly improbable and definitely costly. We are talking Belize by the way, not Canada, by way of example. Third these companies have no obligation to publish financials or provide any accounting of the fees being collected and supposedly held in a risk pool for the payment of claims. Fourth, the policies of coverage (they cannot use terms such as insurance and deductible) usually limit the covering company’s obligations significantly. One policy issued in Belize that I reviewed recently denied any obligation to defend a covered attorney in the event of a lawsuit and created a right on their part to access the attorneys personal and bank records, tax returns, finances and assets so they can recover their losses directly from the covered party!
It appears many attorneys and others are being misled into believing that they can actually receive $2 Million in aggregate insurance coverage for $400 annually rather than $4,000 annually and they will meet their own risk needs and those of their counter-parties in the mortgage industry. This is certainly not the case.
At Secure Insight we do more than just collect documents, we do real analysis, assign risk ratings, and monitor risk 24/7. Reviewing E&O “coverage” is just one way we accomplish that and ensure that our lender clients have a real source to offset potential losses and not one that looks like insurance but is really something else.
To our attorney friends: buyer beware! As my mother used to say, “If it appears too good to be true it usually is dear.”
