Time Keeps Ticking

E&O Coverage for Title Industry

Could this happen to you? Most would say, no, but it happened to one of our more experienced clients, and it wasn’t discovered until years had passed.

A closing took place in upstate NY in 1999. During the transaction it was noted that in addition to a mortgage, there was a home equity loan that had been taken out on the home being sold. At the closing it was shown that the home equity loan had been paid off, and a zero balance was due to this secondary lender. The sale was completed, a title policy was issued, and everyone went on their merry way.

Unknown to everyone, except the seller of the property, the home equity line had a zero balance at closing but had not actually been closed. The seller, who had moved out of state, began to “tap” into the equity line for the next ten years, making minimal interest payments while eventually maxing out the line of credit.

Once maxed out, the loan balance came due in 2009, and suddenly no more payments were being made. The secondary lender discovered the house had been sold to someone else in 1999 and they sought payment for their loss.

The title policy responded, to the tune of $200,000, and the title insurer determined that an obvious error had occurred during the “search”, since the home equity line had not been closed. The company sued the responsible title agent who had issued the policy based on the “incomplete search”. The title agent submitted a claim to their E&O carrier because the “searcher” responsible (an independent contractor) didn’t have an E&O policy of their own.

What makes this case perhaps even more relevant today, is that this client had considered getting a lower cost E&O policy in 2007 by accepting a retroactive date for their policy that year as the new policy’s inception date (matching the effective date of the new policy). They had considered eliminating their prior acts coverage in order to “save money” and letting 2007 become their new “prior acts” coverage date. We had advised them vehemently against this move, for the simple reason that they would have given up all the coverage they had paid for, in this case from 1997 through 2007 – all those coverage years gone. In this instance, this claim would have been denied. The error had occurred in 1999, and with a “claims made” policy the “claim” must be submitted during the active policy year and the “act” must have occurred since coverage was first in force. The prior acts date indicates how far back your coverage will actually go. So, be mindful of your prior acts coverage, and make sure your new policy is honoring that date. If not, you could expose yourself to years of “no coverage” – even though you paid for them.

Another “take away” from this claim is that your subcontractors should also carry their own professional liability policy. Had this searcher had their own policy, our client’s E&O carrier would have been able to seek remediation for their expenses from the independent contractors E&O insurer, since the actual “mistake” was the subcontractor’s to begin with. This 200K mistake will be a “circumstance” noted on our insured’s E&O applications for 5 years after it was closed (finally in 2010).

So, be protective of your retroactive date. It is coverage you’ve paid for and once gone, it cannot be retrieved. Use subcontractors who have E&O coverage of their own. Why should your policy respond to an error you didn’t make? Their lack of coverage can cost you additional premium (for at least 5 years).

NOTE: More title industry professional liability underwriters are requiring those who use “subs” to make certain that these “subs” have coverage of their own (or they will exclude coverage for claims due to use of uninsured “subs”). It’s an industry trend and we want you to be aware of it.

Brian H. Merriam, CPCU, ARM, AAI
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