PF&M AT A GLANCE
Editor's note: This month we introduce "PF&M at a Glance," which provides readers with an abbreviated look at a selected property or liability coverage. The coverages discussed in this column are discussed in greater detail in Rough Notes' PF&M Analysis Service. Agency OnLine subscribers, please refer to PF&M Section 138.4-2, Mortageholders Errors and Omissions Coverage Analysis for more in-depth discussion on this coverage part and PF&M Section 138.5-1, Mortgageholders Errors and Omissions Coverage Form Underwriting Considerations for a discussion on the underwriting and rating of the form. PF&M, available both online and in print, is an encyclopedic reference source for property, casualty and surety business, which is updated monthly. "PF&M at a Glance" is intended to remind agents of a few key elements of coverages, whether these coverages are written regularly by most agencies or not. The PF&M editors will also use the column to notify agents of any current developments having a bearing on the coverages discussed.
Mortgageholders Errors and Omissions coverage is a necessary coverage for many lending institutions. While the title would lead you to go to the liability section of ISO, this coverage form is actually part of the Commercial Property Program and all rules, exceptions and forms are listed in the Commercial Property part of the Commercial Lines Manual.
Banks, credit unions, savings and loans, and other financial or lending institutions protect their loan investments on real property with insurance against direct property losses. This normally is accomplished through loan conditions that require the borrower to purchase property insurance on the mortgaged property in amounts at least equal to the loan.
Most lending institutions carry additional coverage to protect themselves in the event that one of their mortgaged properties falls through the cracks and the required insurance had not been purchased due to an error or omission on their part.
Insurance Services Office (ISO) CP 00 70, the Mortgageholders Errors and Omissions Coverage Form provides protection for such circumstances. It contains four coverage parts:
Coverage A--Mortgageholder's Interest -- in which the interests of the insured mortgageholder are protected by the causes of loss (except earthquake, flood, and certain other perils) for which the insured customarily requires its mortgagors to provide insurance.
Coverage B--Property Owned or Held in Trust -- protects the insured as either an owner or trustee for such property, with basic causes of loss (except vandalism and sprinkler leakage), for up to 90 days.
Coverage C--Mortgageholders Liability provides liability coverage and defense costs due to damages that develop because of the insured's mortgage fiduciary or service agent capacity, but this relates only to the processing and maintenance of valid insurance for a mortgagee.
Coverage D--Real Estate Tax Liability covers damages that may arise due to improper handling of the real estate tax responsibility assumed by a mortgagor.
Highlights
While many aspects of this policy are similar to the Commercial Property policy, there are two exclusions that are applicable only to this coverage part and which could have a significant impact on coverage:
1. Exclusion B.2.c states that coverage is applicable only for 30 days after the discovery of the error or omission. This means that once an error has been discovered, through audit or any other means, a clock starts ticking. If the valid insurance required in this form has not been obtained by the end of the 30 days, all coverage ceases for the identified uncovered properties.
2. Exclusion B.2.d states that coverage is applicable to errors and omissions that relate to the purchase of property insurance only. It specifically states that errors and omissions due to title, mortgage guarantee, life or health and accident insurance are NOT covered. This is an important clarification that should be highlighted to any insured.
Recent developments
Coverage C - Mortageholders Liability wording has been challenged in court. Midland Mortgage Company, Plaintiff v. United State Fidelity and Guaranty Company, Defendant was decided in favor of the plaintiff. The court determined that the wording was ambiguous and that the coverage could be used to defend a class action case. This interpretation should cause a rewriting of this coverage in the near future. *