Understand Your Lender Liability Coverage
Roughly 40 percent of the paid claims for the bank Directors and Officers (D&O) liability policy 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 percent of paid claims while consumer lending represents 14 percent 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 covered under the Lender Liability Endorsement or are they covered 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?
  7. If the carrier recommends a settlement offer and the bank refuses the offer, can the carrier require the Insured to fund a percentage of the defense costs going forward? This is commonly referred to as a “Hammer Clause” and can be found in the defense expense and settlement section of the D&O policy.
  8. Does the Lender Liability Endorsement cover 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? Understanding the exclusions under the D&O policy and Lender Liability Endorsement is just as important as understanding the insuring agreement language and definitions.
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 borrower’s detriment, with borrower’s 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.