Summary:

During the escrow period, the seemingly routine process, an insurance broker acting as an agent of an insurance company issued 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 in ensuring that all necessary documents, including the insurance binder contract, are in place before the 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 document, the insurance binder provides secure temporary insurance coverage, giving all parties a sense of reassurance and peace of mind...

Article:

Three or four weeks after closing, the entire policy usually arrives at 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 had declined coverage initially, and there had been no coverage from the loan's closing until the audit. The insurance agent tried to cover his fraud by claiming the insurance declined coverage because of 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 way before the close of the transaction, and there were no replacement insurers.

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 withheld the fact that no insurance company was stepping up to the plate.

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 the loan servicer will usually advance the insurance premiums and add the amount to the demands for payoff as part of the default. This actionincreased the borrower's financial burden andleft them without comprehensive insurance coverage, potentially exposing them to additional risks.

The lender immediately took action to protect their interests. They placed a forced-order insurance policy on the property to provide coverage and notified the borrower that they had violated a loan covenant by not having 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.

The borrower eventually obtained insurance, demonstrating their willingness to rectify the situation. This positive action should provide some reassurance to all parties involved. However, the cost and wasted time were not worth having the loan on the lender's books. This incident is a stark reminder of the grave financial implications of such actions, especially when there are hundreds or thousands of loans on the lender's books. The borrower's insurance broker and the borrower's actions resulted in increased costs, wasted time, and damaged their relationship with the lender, potentially affecting their future borrowing opportunities.