No Errors and Omissions Coverage for Fraudulent Mortgage Practices
For insurance companies reminiscent of the surge in environmental pollution claims in the early 1980s and now wondering if they will be the ones “left holding the bag” with respect to the still unfolding mortgage crisis, the First Circuit’s recent decision in New Fed Mortgage Corporation v. National Union Fire Insurance Company of Pittsburgh, PA, 2008 U.S. App. LEXIS 20695 (1st Cir. Mass., September 30, 2008), should provide some reassurance.
During a four month period in early 2006, a commissioned mortgage broker for New Fed Mortgage arranged fifteen mortgages through the use of altered credit reports. The result was that the lender incurred greater risk than it had bargained for and, consequentially, faced a loss on resale of the loans. After the lender discovered discrepancies between credit reports submitted by New Fed and credit reports obtained independently, the lender demanded indemnification from New Fed. Following an internal investigation, New Fed concluded that one of its brokers had scanned legitimate credit reports into an outside computer system, altered those reports and then printed the fraudulent reports for submission to lenders. New Fed followed its investigation with a claim to its insurance company, National Union.
National Union denied coverage under an express exclusion for any claim “… alleging fraud, dishonesty, or criminal acts or omissions …”. New Fed responded with an argument that in order to rely on the fraud exclusion, the insurer must first prove that the insured intended to harm the injured party. The First Circuit rejected this argument, finding there was no legal basis for New Fed’s proposed rule and, moreover, found that even if there were such a requirement “it would likely be satisfied here” because the broker who falsified the credit reports “had to know that a false credit report was likely to lead to overpayment and loss.” The final conclusion: New Fed’s claim fit squarely within the fraud and dishonesty exclusion, so the insurer had no duty to defend or indemnify New Fed.
