Summary:
During the escrow period, the seemingly routine process involved an insurance broker acting as an agent of an insurance company issuing a fraudulent binder of coverage to the escrow agent and the lender’s loan processors. The escrow holder, a neutral third party responsible for facilitating the transaction, is crucial to ensuring that all necessary documents, including the insurance binder, are in place before closing.
In the real estate transactional business, the lender’s role in obtaining insurance is crucial, integral, and empowering. The lender’s responsibility to ensure the property is adequately insured as a condition of the closing cannot be overstated.
The lender will require that their names be added as an “additional named insured” on the binder page or face sheet.
As a fully enforceable contract, the insurance binder provides secure temporary insurance coverage, giving all parties reassurance and peace of mind.
Article:
Three or four weeks after closing, the entire policy is usually delivered to the property owner’s location, and a copy is sent to the lender or servicer.
When the lender audited their file 60 days after closing, a commendable practice, they discovered that no original insurance policy had been received. The lender’s proactive approach, which led them to call the insurance company, was crucial in uncovering the fraud. The insurance company initially declined coverage, and coverage did not commence from the loan’s closing until the audit was completed. The insurance agent attempted to conceal his fraud by claiming that the insurance company had declined coverage due to the lender’s harassment. Still, the lender’s vigilance had already uncovered the truth, reassuring all parties of the lender’s commitment to their interests.
Imagine being a loan servicer and discovering that the insurance broker fraudulently issued the binder policy. You are most likely dumbfounded and have a tinge of high blood pressure about the next move. The insurance company declined coverage well before the transaction closed, and no replacement insurers were available.
The pivotal moment in this case was when the insurance agent, entrusted with ensuring the property was adequately insured, issued a falsified insurance binder. This document, stating that the property was covered, was issued during an interim period while the carrier drafted the insurance policy.
The insurance company had declined the coverage, but the lender and the Borrower didn’t know until the discovery. The insurance broker responsible for insuring the property failed to disclose that no insurance company was willing to provide coverage.
The event triggered a default, and the lender/servicer immediately placed a ‘forced-order’ or ‘forced-placed’ insurance policy on the property. This type of insurance only covers the property necessary to protect the lender’s interest, not the Borrower's. It does not cover personal property or liability protection for the property owner. The lender or loan servicer will usually advance the insurance premiums and add the amount to the payoff demand as part of the foreclosure process. This action increased the Borrower's financial burden and left the Borrower without comprehensive insurance coverage, potentially exposing the Borrower to additional risks.
The lender immediately took action to protect their interests. They placed a forced-placed insurance policy on the property to provide coverage and notified the Borrower that the Borrower had violated a loan covenant by failing to maintain coverage. This was not just a breach of contract but a material default that had significant consequences for the lender. The lender’s swift and decisive action in rectifying the situation should reassure all parties involved of their commitment to protecting their interests and maintaining the integrity of the transaction.