When purchasing a policy, brokers must understand exactly what their contracts mean
Tom Delaney, managing director, Bankers Insurance Service
As published in Scotsman Guide's Residential Edition, February 2009.
Especially in today’s market, residential mortgage brokers often have a vested interest in their companies’ insurance policies, even if they don’t have the responsibility for purchasing coverage themselves. But many brokers might not know how to read these policies’ details correctly.
Insurance policies offer coverage through insuring agreements, the heart of insurance policies. These agreements typically consist of a broad statement as to what acts, events or circumstances are covered.
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For example, the insuring agreement of a professional liability policy -- also called errors-and-omissions (E&O) insurance -- for a mortgage firm generally will address what the insurance company will pay in the event of a loss. Because E&O policies respond to litigation that third parties bring against the insured, defense costs and damages resulting from a settlement or judgment rendered against the insured typically are covered.
After crafting this broad insuring agreement, the insurer typically will narrow the coverage’s focus through definitions, exclusions, conditions and other policy provisions. Partly, this is because no single insurance policy can cover every scenario. To focus the policy language on the specific risk transferred to the insurer, coverage includes restrictions outlined in the following areas:
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The insuring agreement
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The policy definitions
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The policy endorsements
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The policy exclusions
Here are examples of how each of these restrictions could appear and of the language used.
Within insuring agreements
Example: “We will pay on behalf of the insured all sums that the insured shall become legally obligated to pay as damages resulting from any claim(s) first made against the insured and reported to the insurer during the policy period for any wrongful act of the insured -- but only if such wrongful act occurs on or after the retroactive date and occurs solely in the rendering of professional services, as defined herein.”
Analysis: Discovery dates and retroactive dates often are referenced in the insuring agreement. Retroactive dates define the prior acts covered by the policy. A policy written with no prior-acts coverage essentially has a retroactive date that matches the effective date of the policy. No loss arising out of the insured’s prior activities or dealings are covered.
A policy offering full prior-acts coverage may have a retroactive date listed as “none.” This means that there is no restriction on how far back the activity that led to the loss occurred.
In this example, the insuring agreement is further narrowed by defining the activities in which the insured must be engaged for coverage to apply. The term “professional services” specifies which professional acts of the insured are covered.
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