Understand Your Lender Liability Coverage
Roughly 40% of paid claims for bank Directors and Officers (D&O) liability fall under the Lender Liability Endorsement.  These claims usually name the entity, however individuals can be named as well. Fifty percent of lender liability paid claims are brought forth by commercial borrowers because of the complexity of commercial lending.  Construction lending represents roughly 18% of paid claims while consumer lending represents 14% of paid claims.

The importance of understanding the Lender Liability Endorsement should be a top priority. Consider the following questions when negotiating D&O policy terms, conditions and pricing:
  1. What is the carrier’s D&O definition of lender liability?
  2. What defines a claim?
  3. How many days’ notice is required to put the carrier on notice of a claim or a potential matter that could give rise to a claim?
  4. Are the directors, officers and employees picked up under the Lender Liability Endorsement or are they picked up under the policy’s Executive Liability and Company Reimbursement Endorsements (Agreements A&B)?
  5. Will a paid claim under the Lender Liability Endorsement erode the limit for future claims brought forth against directors and officers that are lending or non-lending related?  Separate limits are preferable over shared limits.
  6. Is the bank afforded the privilege to choose their own attorney as long as the attorney is approved by the carrier or will the carrier control defense, settlements and judgments?
  7. If the carrier hires their own attorney to represent the insured and the bank doesn’t agree with the carrier’s settlement or judgment, what percentage of defense costs are picked up when the bank hires their own attorney to defend the claim moving forward? This is commonly referred to as “Hammer Clause” and can be found in the defense expense and settlement section of the D&O policy.
  8. Does the Lender Liability Endorsement pick up claims brought forth by guarantors and third parties?
  9. Is the limit that the bank carries adequate compared to the  lending liability exposure?
  10. What exclusions could come into play that could affect a lender liability claim? Knowing the exclusions under the D&O policy and Lender Liability Endorsement is just as important as knowing the policy language
The leading causes of action brought forth against banks, directors, officers and employees regarding lending matters are breach of contract, fraud, breach of implied covenant of good faith and fair dealing, breach of fiduciary duty, negligence, economic duress, and misrepresentation. Common claim exposures include the following:

  • Wrongful refusal to honor the loan commitment
  • Wrongfully failing to fund a loan
  • Wrongfully refusing to renew a loan
  • Negligent processing or administering of loan
  • Selling borrower collateral at less than market value
  • Wrongful foreclosure or improper foreclosure
  • Wrongfully honoring alleged “side deal”
  • Interfering, to borrowers detriment, with borrowers’ day to day management or relations with third parties
  • Other acts or failures that constitute a breach of lenders duty of good faith 
  • Violation of consumer lending law or regulation
If you are interested in finding out more about MBIS or the products available please contact Jeff Otteson at 608-217-5219 / jeffo@mbisllc.com or Adam Dawson at 952-857-2604 / adamd@mbisllc.com.