In today’s business environment, every company providing a professional service to the public should have errors and omissions protection. The mortgage broker/lender industry is the latest to be hit with litigation. There are suits being filed in courts all over the country. You are probably wondering if there is any protection for your company from these suits. One answer is errors and omissions insurance.

What is errors and omissions insurance? This coverage is designed to provide defense costs and protect you from mistakes and omissions you or your employees make in their jobs.

You need to be aware that not all policies are the same. There is not a standardization of policy wording. Be sure to get a sample policy or at least deal with an agency that specializes in your industry and knows the needed coverage.

There are really two types of policies: mortgage impairment and professional liability. The mortgage impairment policy is designed to protect from the failure to determine a property is in a flood zone, or failure to pay real estate taxes and hazard insurance premiums. This policy is critical to companies that are servicing loans. Some of these exposures apply to non-servicing companies too. The other type of policy is professional liability coverage. This policy provides the defense costs and protection for omissions or mistakes. The policy pays on your behalf those sums in excess of the deductible and within the applicable limit of insurance you become legally obligated to pay as damages or claim expenses because of claims as a result of a wrongful act in performing "insured services" for others. Please read the policy definition of "insured services" carefully.

When shopping for an E&O insurance policy, you need to first determine what type of protection you want or need. The insurance company or agency you are working with should be able to assist you. The insurance company needs to know as much about your company as possible. If you do not disclose all your operations, you may be shocked to find a claim denied that could have been covered. How much will the policy cost you? The comprehensive policies cost from $2,000 and up. You know the saying: "You get what you pay for," Well, if your policy is costing much less than $2,000, buyer beware! You may be surprised at what it covers or does not cover.

What limit of liability should you purchase? This is a commonly asked question. How much could a jury award to one of your customers? Good question. Most government agencies and warehouse lenders require at least $300,000. This limit may not be adequate. You should at least have the company quote higher limits of liability for your company.

The following are sample claims that have been paid by insurance companies:

I. A married couple applied for a loan with a local mortgage company. During their conversation with the broker, they repeatedly asked whether there were any charges other than the normal points and closing costs, given that they were assuming an FHA loan. The broker assured them that there were no additional charges. Several months after they closed on the house, the couple was informed by the FHA that they were required to pay for loan insurance during the life of the mortgage. The couple sent a letter to the broker demanding that the broker either rescind the transaction or pay for the loan insurance. The claim was favorably resolved, but defense costs were incurred.

2. A homeowner attempted to refinance his mortgage. The mortgage broker advised him that the mortgage could be refinanced under certain very favorable terms that were available for a limited period of time, and the broker confirmed the terms in writing. The broker misplaced the loan papers, however, and by the time he located them, the favorable terms had expired. The homeowner filed suit against the broker alleging negligence. He sought over $20,000 in damages, based on what he would have saved over the life of the loan under the terms represented to him by the broker. The claim was settled by payment of almost $10,000 to the claimant, legal fees were nearly $20,000.

3. An alleged processing error was the catalyst for a recent claim against a mortgage broker. The broker negotiated an adjustable-rate mortgage at a preferential interest rate. In the course of preparing the Truth-in-Lending (TIL) disclosure statement, the loan processor mistakenly pulled the TIL form for a 30-year fixed loan and entered the agreed- upon adjustable-rate. The borrower sued for the more preferential rate of a 30-year fixed term, demanding the value of the difference in the loans in excess of $150,000. Defense costs may necessitate retaining an expert witness to calculate economic damages. The claim is pending final judgment.

4. A self employed professional applied, over the telephone, for a 15-year mortgage. Trying to save time, the broker acknowledged her status as a "professional," took down her income, and proceeded to process the loan. The mortgage company discovered one week prior to the locked in expiration date, that the oral figures were not consistent with verification reports and requested written financials. The borrower could not respond in time to the broker's last minute request and did not qualify for the loan. The lock-in expired and interest rates skyrocketed immediately afterward. The borrower, claiming negligence in breach of fiduciary duty and misrepresentation, sued for the difference between the rate and loan she would have had and the new, higher rate and loan amount. A $16,000 arbitration judgment favored the borrower.

5. A second mortgage for home improvement work resulted in a suit brought against a mortgage broker in a jurisdiction notorious for significant punitive damage awards. The borrowers alleged that the mortgage broker was the principal for the contractor and that the repair work was shoddily performed. They also claimed they were grossly overcharged for the repairs that were never completed. The contractor involved later declared bankruptcy. The suit included allegations of fraud, mental anguish, violations of the Truth-in-Lending Act, and sizable punitive damages. Mediation between the parties resulted in a settlement exceeding $50,000 plus payment for further repairs to the home, forgiveness of the note's balance, as well as defense costs in an undisclosed amount.

This article is designed to give you a basic overview but can not provide you all the details of the policies. You should contact an insurance professional and ask for specific information regarding your individual situation. The key is to know that you are protected in today's litigious environment. You would hate to have a single error or omission result in a major loss to your business.