As the landscape of homeowners insurance continues to evolve, lenders and banks are tightening their requirements for policy documentation. These changes are prompting a shift in how insurance agencies interact with both their clients and third-party financial institutions. To stay compliant and avoid liability, agencies must understand what lenders are asking for and what they should not be doing in response.
What Lenders Are Requiring
More lenders are requesting detailed, specific confirmation of insurance coverage as a condition of funding loans. While this protects their investment, it puts insurance agencies in a risky position, especially if they respond directly. Miscommunications or incorrect confirmations could lead to costly Errors & Omissions (E&O) claims.
We’ve heard from several OIA members about increasingly specific demands from mortgage lenders, particularly from Wells Fargo. These requirements are typically about the following details:
- Endorsements: The policy must include a list of all endorsements along with the endorsements text descriptions.
- Replacement Cost Coverage: Policy limit covers at least the full replacement value of the property, including the roof. Provide replacement cost language. If replacement is not at least full coverage or is excluded, provide the supplemental policy along with standard hazard policy.
- Wind and Hail Coverage: These cannot be excluded from the policy.
- Deductible Limits: The deductible must not exceed 5%.
- Claims: All claims are paid without deduction or depreciation.
- Mortgagee Clause: The mortgagee and loan number must be clearly listed on the policy.
These requirements are meant to reduce lender risk, but they also increase the burden on agencies to provide accurate documentation without stepping outside their professional boundaries.
The E&O Risk for Agencies
One of the biggest concerns for agencies is the potential for Errors & Omissions (E&O) claims. When lenders request specific coverage confirmations, they are, in effect, asking agencies to assume liability. If an agency misrepresents coverage details and the lender relies on that information, any resulting uninsured loss could lead to an E&O claim against the agency.
To mitigate this risk, agencies should avoid providing direct responses to lenders about policy specifics. Instead, the best practice is to:
- Provide the full policy or quote to the client.
- Instruct the client to submit the documentation to their lender or bank.
- Refrain from answering coverage-specific questions from third parties.
E&O Statement on Lender Requests
If an agency misrepresents a client’s coverage and the bank relies on that information, any uninsured loss on the property could result in an E&O claim against the agency. To help Ohio agencies better navigate lender coverage verification requests, we reached out to several of our E&O partner carriers. Across the board, carriers shared the same concern—responding directly to a lender’s detailed coverage requirements can create significant liability for the agency.
Swiss Re
“In these situations, it is best for the agency to provide a full copy of the policy to their customer with instructions to submit to the bank/lender contact. The customer is the one with the responsibility of meeting the lender’s requirements, not the agency. The agency should also not respond to any specific questions about coverage to the bank/lender. This is a 3rd party, and the agency does not have an obligation to them, only to their customers.”
Utica
“Here is our suggested disclaimer language when releasing the policy/quote to the customer:
‘Please find attached the requested policy/quote for your review. Please read the policy/quote carefully to determine if it meets your lender requirements. The agency cannot provide legal advice regarding contracts and does not warrant, guarantee, or represent that the policy/quote meets your lender requirements. An opinion on whether the limits, terms, conditions, and exclusions in the policy/quote meet your lender requirements should be obtained from your legal counsel.’”
Legal Considerations: Who Can Share What?
Legally, the policy agreement is between the customer and the insurance carrier—not the agency and the lender. This distinction is critical. Agents are not authorized to send full policies directly to lenders or banks. However, with the client’s permission, they may provide a summary of insurance.
Here’s how agencies should handle these situations:
- Communicate clearly with the client that the lender is a third party.
- Explain that the agency can send the full policy to the client, who can then forward it to the lender.
- Avoid giving legal advice or making assurances that the policy meets lender requirements. Clients should consult their legal counsel for that.
By staying informed and setting clear boundaries, insurance agencies can protect themselves while continuing to support their clients effectively. As lender requirements grow more complex, proactive communication and a firm understanding of legal responsibilities are more important than ever.
The team at Ohio Insurance Agents Association, Inc. wants to stay in tune with how lenders are working with our members. If you’ve had similar experiences with your clients’ policies, we’d like to hear from you. Please contact Jeanie Giesler, Resource Center Advisor, at (614) 552-3054 or jeanie@ohioinsuranceagents.com. If you have questions about E&O exposures or would like to learn more about OIA’s E&O program, contact Ashley Riley, Director of Risk Management, at (614) 552-3052 or via email at ashleyr@ohioinsuranceagents.com.
About the Author
Jeannine Giesler, CISR, CPIA, and past President of the OIA Board of Directors, Foundation for the Advancement of Insurance Professionals, currently serves as Resource Center Advisor for the OIA. The purpose of the Resource Center is to contribute to building a comprehensive library of resource materials for our members. We pride ourselves on being the one-stop shop for all OIA members and work to solve every problem or situation you may come across.
