A mortgage broker's errors and omissions (E&O) policy did not provide coverage as interpreted under Arizona law in 11333 Incorporated v. Certain Underwriters at Lloyd's, London, ___ F. Supp. 3d ___, No. CV–14–02001–PHX–NVW, 2017 WL 2556755 (D. Ariz. June 13, 2017), appeal docketed, No. 17-16331 (9th Cir. June 28, 2017).
The coverage claim in this case was based on a bank's losses from a defaulted mortgage. The mortgage broker was the policyholder of the E&O Policy. The broker claimed that its E&O policy covered it for the alleged losses of its client, the lender. The lender's losses in particular were allegedly caused by the broker's failure to secure fire or flood insurance coverage for property that a borrower put up as collateral for the mortgage loan when the borrower defaulted and the lender foreclosed. Parenthetically, the amount of the mortgage loan was $18 Million and the borrower was a subdivision land developer.
In that case, the broker was not merely wearing the hat of a mortgage broker, but it also put on the hat of a mortgage servicing agent for the loan and it put on the additional hat of a legal fiduciary as manager of the same lender's assets generally. There was apparently a strong relationship between this particular mortgage lender and this particular mortgage broker-servicer-fiduciary.
However, the Insuring Agreement of the insurance policy in question provided coverage only for “[l]oss to the Insured's Mortgagee interest or Owner interest, including when acting as a mortgage servicing agent or in a legal fiduciary capacity, in real property[.]” Although there was certainly a "loss" in the sense that the borrower had previously defaulted on the mortgage and the lender had previously foreclosed on the collateralized property, the mortgage broker was the "Insured" under this policy and the mortgage broker did not have a mortgagee or ownership interest in property so that the "loss" was not a covered loss under this policy language.
Moreover, the mortgage broker's client, the lender who suffered the alleged loss, was not named as an additional insured in the E&O policy. In this case, the Court pointed out, only the lender had a mortgagee's interest while the mortgage was in place and only the lender (through a subsidiary it invented) had an ownership interest when it foreclosed. At no time did the broker have either a "mortgagee interest or an owner interest."
Judgment against the mortgage broker: No E&O coverage under this policy.
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