Many lenders mistakenly believe that as long as they receive a closing protection letter (CPL) from a title agent or closing attorney then they have nothing to fear about a loss that may occur at the closing table. These lenders may collect an agent’s insurance certificate or declaration page but take no steps to verify insurance is valid, paid and in effect.
There are serious negative consequences with this approach to risk management and loss mitigation.
I have covered the inadequacies of the CPL elsewhere and will not repeat them all today. To summarize: its not insurance, it does not cover all risk (including cyber, general fraud, wire fraud) and it is aggressively defended when claims are made. In addition, recovery under a CPL may be restricted if their is a bond or insurance policy available for offset and subrogation which makes verification of those items critical.
Agent’s are not universally required by all states to carry errors and omissions coverage or a fidelity bond so no lender can simply assume that everyone carries them. While no serious professional would operate without having some form of insurance protection, lender’s must inquire because no lender should do business with anyone who fails to carry reasonable coverage. Quite frankly, no lender should agree to send a wire and loan documents to any professional who does not have insurance coverage sufficient to cover potential losses at a closing. In today’s wire fraud environment the case for requiring cyber liability coverage (often not covered in traditional E&O) is also highly warranted.
Insurance verification can be a tricky process. Simply collecting a certificate of insurance or declaration page is not enough. Policy limits, policy restrictions, previous incident omissions and paid status (i.e. paid in full or financed) are key issues which must be addressed. Furthermore proper verification cannot take place without an authorization from the agent and confirmation with the insurance office where the policy or bond was issued.
No risk management process is foolproof. No risk assessment tool is 100% accurate. No vendor warranty or guarantee is absolute. Accordingly lenders must consider how they will manage insurance and bond verification and ensure they have a process in place so that when an event takes place, there will be a reliable source of recovery beyond a restrictive and very limited closing protection letter.
At Secure Insight we obtain digital authorizations from all closing agents allowing insurance and bonds to be verified. Insurance and bonds are confirmed with the issuing office, payments verified and financed payments tracked. Our agent risk reports set forth types of coverage, including cyber, and their coverage limits and expiration dates. We took these steps from day one, way back in 2012, because our process was built in conjunction with risk advisors from Lloyds who understood well the need for comprehensive risk assessment to avoid losses.
In our world where reducing the risk of loss at the closing table is a paramount concern, we understand that the CPL is not enough to offset and manage a loss event that could cost you hundreds of thousands of dollars and a hit on your reputation.