booklet test

MORTGAGE COMPANY 

Professional 

Liability 

Coverage 

www. gordonrees. com

CONTENTS 

Scope of Coverage.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 

The Insuring Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4 

Scope Of Coverage. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8 

Defense And Settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10 

Exclusions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13 

Common Endorsements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17 

CONTACT 

Randall I. Marmor 

Gordon & Rees 

One North Franklin, Suite 800 

Chicago, IL 60606 

phone: 312.980.6778 

email: rmarmor@gordonrees.com 

Craig Jacobson 

Gordon & Rees 

One North Franklin, Suite 800 

Chicago, IL 60606 

phone: 312.980.6784 

email: craig.jacobson@gordonrees.com

MORTGAGE COMPANY 

PROFESSIONAL LIABILITY COVERAGE 

INTRODUCTION 

A professional liability policy insures professionals against loss arising from claims brought against them 

by persons for whom the insured provides professional services. The policy typically provides a defense 

and indemnity in connection with claims alleging errors and omissions. It is insurance that protects the 

professional activities of those who have specialized knowledge or skills through education or experience. 

Historically, such policies were issued mainly to professionals such as accountants, attorneys, doctors or 

engineers, but the coverage can also apply to persons engaged in other specialized fields who desire 

coverage for their wrongful acts 

The Mortgage Company Professional Liability Policy (“MCPL policy”) provides errors and omissions 

coverage to professionals and companies working in the real estate finance industry, such as mortgage 

bankers and mortgage brokers. The policy provides defense and indemnity protection from claims that 

may be brought by borrowers or other third parties for whom the insureds have provided services, such 

as arranging, documenting and/or servicing mortgage loans. The coverage is provided for claims arising 

from any alleged failure by the professional to perform, or to adequately perform, professional services 

in connection with such work. The following is an overview of the coverage under the MCPL policy. 

PROFESSIONAL LIABILITY COVERAGE · 4

THE INSURING AGREEMENT 

The Insuring Agreement of the MCPL policy states as follows: 

The Company will pay on behalf of the Insured Loss in excess of the Retention stated in Item 4 of the 

Declarations which the Insured shall become legally obligated to pay as a result of any Claim first made 

against the Insured during the Policy Period for a Wrongful Act that occurred on or after the Retroactive 

Date stated in ITEM 6 of the Declarations. 

Under the Insuring Agreement, the MCPL policy provides a defense and indemnity to any “Insured” who sustains a 

“Loss” from a “Claim” made during the policy period for a “Wrongful Act” that occurred on or after the retroactive 

date as set forth on the declarations page of the policy. The terms “Insured,” “Loss,” “Claim” and “Wrongful Act” 

are defined in the MCPL policy, and those definitions must be considered when evaluating coverage. A discussion 

of these key definitions as they relate to coverage follows below. 

A. WHO IS AN INSURED? 

As defined in the MCPL policy: 

“Insured” means the individual, partnership, corporation or other entity named in Item 1 of the Declarations 

and shall include all persons who were, are or shall become: 1) directors, officers, partners or employees of the 

Insured while acting within the scope of their duties as such; and 2) the executors, heirs, legal representatives 

or assigns of each Insured otherwise insured herein in the event of his or her death, incompetency, insolvency 

or bankruptcy. 

Coverage under the MCPL policy applies to both the named insured and to its management and employees, but 

only while they are acting within the “course and scope” of their duties. To the extent Claims involve deceased, 

incompetent or insolvent insureds, those parties’ successors or legal assigns are also covered. 

The foregoing definition may be extended by endorsement to include other specifically named (or described) entities. 

For example, coverage may be extended by endorsement to “independent contractors” retained by an insured. 

B. WHAT CONSTITUTES A LOSS? 

As defined in the MCPL policy: 

“Loss” means money damages, settlements, and Defense Costs. Loss shall not include: 1. punitive or exemplary 

damages or the multiplied portion of a multiplied damages award; 2. criminal or civil fines or penalties 

imposed by law; 3. taxes; 4. matters that may be deemed uninsurable under the law pursuant to which this 

Policy shall be construed. 

Loss is commonly construed as an amount that insureds are either financially liable or legally obligated to pay. 

As defined in the policy, a “Loss” is limited to damages, settlements and Defense Costs (which is a separately 

defined term). It does not include: 

• Restitutionary awards, such as an order requiring the insured to repay excessive fees that were 

improperly charged; 

• Fines or penalties imposed by law, e.g., a fine levied by a governmental agency for regulatory violations; 

• Non-monetary remedies, such as Claims seeking injunctive relief; 

• Awards of punitive or criminal damages, or multiplied damage awards; 

• Tax losses; 

• Other matters deemed uninsurable. For example, in some jurisdictions, including California, 

Claims for punitive damages are uninsurable as a matter of law. 

5 · PROFESSIONAL LIABILITY COVERAGE

C. WHAT ARE DEFENSE COSTS? 

The MCPL policy covers Loss as a result of a Claim, and Loss, as defined in the policy, includes Defense Costs. The 

policy provides the following definition of Defense Costs: 

“Defense Costs” means reasonable and necessary legal fees and expenses incurred with the approval of the 

Company in connection with the investigation, adjustment, settlement, defense or appeal of a Claim made 

against an Insured for a Wrongful Act, and shall include the cost of attachment or similar bonds. Payment of 

Defense Costs by the Company shall reduce, and may exhaust, the Limit of Liability under this Policy. 

“Defense Costs” shall not include salaries, wages, fees, overhead, overtime, or benefit expenses incurred by 

or associated with the Insureds. 

Legal Fees and Expenses. Defense Costs include legal fees and expenses that are incurred in connection with the 

investigation, adjustment, settlement, defense or appeal of a Claim. They do not include fees or costs incurred 

by the insured for other purposes, such as costs incurred in analyzing the potential for coverage under the policy 

or the availability of other insurance. Internal costs, such as salaries, fees, overhead or overtime, also do not 

constitute Defense Costs. 

Reasonable and Necessary. Defense Costs compensable under the policy are limited to those fees and expenses 

that are “reasonable and necessary.” The reasonableness of fees and expenses depends on the nature and venue 

of the Claim. Rates must be commensurate with the location in which the litigation is pending and the complexity 

or special knowledge required under the circumstances. The necessity of fees and costs likewise depends on 

the case, but generally Underwriters will pay for only one firm to defend the Claim and will not pay for travel 

expenses incurred if the firm is not located in the venue where the action is pending. 

Approval of the Company. Under the policy, Defense Costs may be incurred only with the approval of Underwriters. 

Underwriters will often give deference to an insured’s choice of counsel, subject to approval of the firm’s rates, 

qualifications and geographic proximity to the case. Costs incurred before an insured gives notice of Claim are 

not incurred with Underwriters’ approval and therefore cannot satisfy the applicable retention or be considered 

for coverage under the policy. 

Defense Within Limits. Defense Costs are part of, and not in addition to, the limit of liability under the policy. The 

payment of any Defense Costs reduces, and may entirely exhaust, the limits of liability and Retention amount in 

the MCPL policy. 


D. WHAT CONSTITUTES A CLAIM? 

The Insuring Agreement of the MCPL policy applies to “Loss…which the Insured shall become legally obligated 

to pay as a result of any Claim…” A “Claim” is defined as: 

a written demand for money damages received by an Insured, including service of suit and the institution of 

administrative or arbitration proceedings. 

Types of Claim. As so defined, a Claim may include a legal proceeding, i.e., (a) a suit that has been served on 

the insured or (b) an administrative or arbitration proceeding that has been instituted against it. However, a legal 

proceeding is not required to constitute a Claim. Any written demand made upon the insured for the payment of 

money damages may be considered a Claim, e.g., a letter sent to the insured demanding damages. 

Money Damages. Not all suits or demand letters necessarily constitute a Claim. The MCPL policy covers demands 

for payment of damages. Thus, a demand that seeks reimbursement of allegedly improper charges imposed by 

the insured does not seek money damages and is not a Claim. Likewise, the following categories of demands or 

suits do not qualify as a Claim if they do not include a demand for payment of damages: 

• A suit that seeks equitable relief, such as injunctive or declaratory relief, 

if it does not include a demand for money damages; 

• A mere accusation of wrongdoing; 

• Disciplinary proceedings; 

• News accounts or other public reports of an insured’s professional misconduct. 

Governmental Investigations. An insured may tender notice of a subpoena or other investigation by a 

governmental entity, such as a regulatory agency. Subpoenas and other investigations generally do not qualify 

as a Claim under the policy definition. The policy does not afford the insured a defense to such proceedings, nor 

indemnify the insured for the cost of its response. 

A Claim typically does not include a governmental agency’s order requiring the insured to comply with regulations, 

to pay fines or penalties or to pay restitution. Such orders are not demands for payment of damages. However, 

even if a governmental action qualified as a Claim, any resulting Loss is expressly excluded under the terms of 

the policy. 

Repurchase Demands. The MCPL policy is frequently issued to mortgage lenders who originate mortgage loans 

to borrowers and then sell the loans to third party investors. The loan sale contracts governing the sale of the 

loans require the insured, as seller, to repurchase the loans it sold in the event of an early payment default or if 

loans do not meet specific quality standards. When the loan buyer sends a letter that demands “repurchase,” it 

usually does not demand payment of damages, but rather seeks adherence to the terms of the parties’ contract. 

Such demands generally are not “Claims” within the meaning of the MCPL policy. 

Repurchase demand letters typically are potential Claims, rather than actual Claims. If the loan buyer eventually 

files a lawsuit seeking, for example, damages for breach of contract, the repurchase demand may become a 

Claim. In such cases, however, other exclusions of the MCPL policy often apply to preclude coverage. 

Class Action Complaints. Class action complaints may include damages allegations that trigger a duty to defend 

under the policy. Defense Costs can be high, but frequently only a small portion of the resulting civil judgments 

or settlements are attributable to Claims seeking recovery of damages. The larger component of class action 

awards tend to be based on restitution or civil penalties that are more easily awarded on a class-wide basis. That 

portion of class action judgment awards are not within the scope of the coverage. 


E. WHAT CONSTITUTES A WRONGFUL ACT? 

The insuring clause of the policy applies to “Loss… as a result of any Claim first made against the Insured … for a 

Wrongful Act….” The MCPL policy states: 

“Wrongful Act” means any actual or alleged negligent act, negligent error or negligent omission committed 

by the insured solely in the performance of or failure to perform professional services for others in the 

Insured’s Profession as stated in Item 1.A. of the Declarations. 

Negligent Act, Error or Omission. Coverage under the policy applies to a “Wrongful Act,” defined as a “negligent 

act, negligent error or negligent omission” by the insured. This condition does not necessarily limit coverage to 

Claims that assert a “negligence” cause of action. Courts generally hold that the phrase “negligent act” implies 

that the conduct giving rise to the alleged liability must be inadvertent or unintentional in some sense. The cause 

of action may be based on a contractual relationship, statutory violation or a tort that does not require intentional 

conduct. The specific tort at issue should be evaluated to determine whether “intent” is an element. 

The Claim allegations against the insured must “sound in” negligence. In practice, that means that many lawsuits 

superficially alleging only intentional conduct or that do not describe the defendant’s “intent” may trigger 

coverage if the liability might arise from a negligent act. 

Performance of or failure to Perform Professional Services for Others. Coverage applies only when the alleged 

negligent act, error or omission arises from the performance of or failure to perform professional services for 

others in the insured’s profession. The insured’s profession is typically identified in the policy declarations. 

“Professional services” has generally been interpreted to mean that there must be some service performed for 

another. Thus, for example, under this condition professional liability coverage does not apply to employment or 

partnership disputes, or to conflicts with competitors alleging theft of proprietary customer information, since 

the Claims do not involve the performance of professional services for others. 

In one case, an attorney’s conduct of a lawsuit in which he represented himself did not constitute a “professional 

service” as it did not involve services performed for another, namely a client. Also, general administrative activities 

are not considered to be “professional services” because they do not involve expertise related to performance 

of a particular profession. 

The professional services requirement has not been as uniformly enforced. In a recent case, the court held that 

fraudulent conduct by lawyers arose out of the rendering of professional services because had defendants 

not been acting as attorneys they would not have been able to commit the alleged fraudulent acts. While the 

insurance company was correct that the definition of legal services typically does not (and should not) include 

the commission of fraud, the acts alleged in the underlying complaint qualified as professional services because 

they bore a substantial nexus to professional services sought. 


SCOPE OF COVERAGE 

A. CLAIMS MADE COVERAGE 

Coverage under the MCPL policy applies only to Claims that are first made against the insured during the policy 

period. Coverage under the policy is not triggered when a Wrongful Act occurs, but rather when a “written 

demand for money damages” is made to an insured within the policy period. 

Future Claims. An insured might become aware, during the policy period, of a Wrongful Act or other circumstances 

that it believes may give rise to a future Claim against an insured, but an actual Claim has not yet been made. 

In that event, if the insured provides written notice to Underwriters, and identifies the Wrongful Act, potential 

claimants and damage that may result, then any future Claim arising from those circumstances shall be deemed 

to have been made at the time such written notice was given. (Condition VI.B.). 

Matters that Preceded the Policy Period. The MCPL policy excludes coverage for events and circumstances that 

were the subject of a Claim or notice under a prior policy. (Exclusion O.1). It also excludes coverage for any Loss 

that results from any events or circumstances, known to the insured prior to the policy’s “Coverage Date,” that 

would cause a reasonable person to believe that a Claim for a Wrongful Act may be made. (Exclusion O.3). The 

“Coverage Date” is set out in the Policy declarations. The date typically coincides with the inception date of the 

first policy issued to the insured by Underwriters. An insured is not excused from giving notice on the basis that 

it thought the Claim lacked merit. The insured must give notice of circumstances if a reasonable person would 

believe that a Claim may ensue 

Underwriters also request that applicants disclose in the policy application any circumstances that they are 

aware of prior to policy inception that could lead to a Claim. If an applicant is aware of circumstances and facts 

prior to policy inception that ultimately lead to a Claim during the relevant policy period—but fails to disclose 

those facts or circumstances in the policy application—the insurer may deny coverage or possibly rescind the 

policy. Courts often rely upon both the insurance application and policy language when ruling that the prior 

knowledge exclusion defeats coverage for the named insured based on knowledge of a single insured who failed 

to identify facts or circumstances in the policy application that could lead to a Claim. 

Interrelated Wrongful Acts. The MCPL policy provides that Claims arising out of “a single Wrongful Act or 

Interrelated Wrongful Acts shall be treated as single Claim…and such Claims shall be subject to the same Limit 

of Liability.” (Condition V.C.). The Policy defines “Interrelated Wrongful Acts” as Wrongful Acts that have “as a 

common nexus any fact, circumstance, situation, event or transaction or series of facts, circumstances, situations, 

events or transactions.” (Condition III.G.). 

To the extent two Claims arise from Interrelated Wrongful Acts, they are treated as a single Claim, and each single 

Claim is considered first made when the earliest of the Claims was first made. The Claims are subject to the same 

Limit of Liability and to a single Retention amount. (Condition V.C.). 

Whether two or more Claims arise from Interrelated Wrongful Acts depends on the facts alleged. For example, a 

letter from a claimant demanding payment and a subsequent suit brought by the same claimant to enforce the 

payment obligation would likely be deemed to arise from Interrelated Wrongful Acts. Also, multiple suits brought 

against the insured by different claimants based on a common scheme or pattern of alleged wrongful conduct 

by the insured may also be interrelated. 

Class action complaints may raise issues of interrelatedness, i.e., that Claims asserted by the respective class 

members are interrelated and thus subject to a single limit of liability. 


B. NOTICE OF CLAIMS 

The MCPL Policy requires the insured to provide notice of a Claim “as soon as practicable, but in no event later 

than sixty (60) days after the date such Claim is first made.” (Condition VI.A). 

Some professional liability policies provide “Claims made and reported” coverage. Under such policies, as a 

condition precedent to coverage, the Claim must be made against the insured, and notice of Claim must be given 

to the insurer, during the policy period. In contrast, the MCPL policy requires notice as soon as practicable not to 

exceed 60 days from the date of the date of the Claim. Also, the notice provision is not conspicuously identified 

as a “condition precedent” to coverage, either in the initial grant of coverage or at the beginning of the policy. 

Thus, although the notice provision states that compliance is a “condition precedent” to coverage, many courts 

will hold that the notice provision is not and, therefore, apply the notice prejudice rule to any violations of notice 

provision by the insured. 

Courts construe notice requirements as imposing a requirement of reasonable notice under the circumstances or 

substantial compliance. In a majority of states, an insurer is required to show that it was substantially prejudiced 

by an insured’s untimely notice before coverage can be denied on notice grounds. Prejudice will depend on the 

particular facts and circumstances, but is typically a high burden for the insurer to satisfy and late notice is thus 

not an absolute bar to coverage absent a showing of prejudice. 

C. RETROACTIVE DATE 

Coverage under the MCPL policy applies only to “Loss…as a result of any Claim…for a Wrongful Act that occurred 

on or after the Retroactive Date” specified on the policy’s declarations. The MCPL policy is often subject to 

graduated retroactive dates. Higher limits may be afforded for Claims that result from Wrongful Acts that occur 

on or after later retroactive dates. 

A retroactive date that is closer in time to the inception of the policy period can greatly reduce the scope of 

coverage. Claims under the MCPL often relate to problem loans, which may not become evident until the loan 

has been in existence for a period of time. 

D. RETENTION 

The MCPL policy applies to Loss in excess of the Retention amount stated in the policy Declarations. The 

Retention is the amount of the otherwise covered loss that is uninsured and must be borne by insured. The 

insured bears responsibility to pay the entire Retention amount before Underwriters have any duties to make 

payments. (Condition V.D). 


DEFENSE AND SETTLEMENT 

A. DUTY TO DEFEND 

The MCPL policy provides that Underwriters 

have the right and duty to defend any Claim to which this insurance applies, even if any of the allegations of 

the Claim are groundless, false or fraudulent. 

Scope of Duty to Defend. The policy imposes on Underwriters the duty to defend the insured as long as there is 

the potential for coverage for a Claim against an insured, even if the Claim is groundless, false or fraudulent. This 

duty is referred to as the “potentiality standard.” 

The duty to defend is broader than the duty to indemnify and is determined by the allegations in the Claim. 

In a duty to defend policy, the insurer provides an attorney and assumes the defense of a Claim against the 

insureds under the policy. The insurer’s obligation to defend a Claim is triggered whenever the facts alleged by 

the claimant could even potentially result in a judgment within the scope of coverage. The insurer is required 

to provide a full defense to all Claims, even if some allegations would be uncovered. A suit containing any 

potentially covered allegations must be defended even when it is unlikely that a settlement or judgment will fall 

within the indemnity coverage. 

If the allegations in the underlying complaint are vague or contradictory, the insurer must assume that the duty 

to defend has been triggered as long as the Claim contains allegations that “sound in” negligence. Although the 

policy covers only negligent acts, a Claim that apparently alleges only intentional acts, or that does not describe 

the insured’s intent, may trigger a duty to defend if there is any possibility that liability might arise from a 

negligent act. In one case, a court held that an insurer had a duty to defend a lawsuit alleging intentional conduct 

by an employer who decided to terminate an employee benefit plan and deny benefits to plan participants. 

The court concluded that the coverage for negligent acts may include decisions which are discretionary and 

intentionally made, but may also nonetheless be negligent decisions. 

Options of Insurer. On presentation of Claims, an insurer generally has three options: 

1. Accept Coverage and Defend. If the insurer accepts coverage, it generally retains counsel to defend 

the insured, pays defense counsel, controls the Claim defense and pays amount of any settlement or 

judgment, subject to the policy Retention amount. 

2. Deny Coverage. If the insurer denies coverage and refuses to defend the Claim, the insured has the 

right to retain defense counsel, control the Claim defense and settle without consent of the insurer or 

take the Claims against the insured to judgment. In some jurisdictions an insurer that denies coverage 

must promptly initiate a declaratory judgment action seeking a declaration of no coverage in order to 

preserve its defenses. 

3. Defend under a Reservation of Rights. The insurer may reserve its right to challenge both its defense 

and indemnity obligations by agreeing to defend the Claim under a reservation of rights. The insurer 

notifies the insured in writing that it will defend the insured, but that it is reserving its rights under the 

policy to challenge at a later time whether it owes a duty to defend or a duty to indemnify. If an insurer 

reserves such rights, the insurer may conduct an insured’s defense in good faith without waiving its 

right to assert any policy defenses, provided it gives the insured notice of any potential defenses in the 

reservation of rights. In some cases, an insurer defending under a reservation of rights may be able to to 

recoup defense costs in the event that the Claim is ultimately determined not to be covered. 

Independent Counsel. Underwriters have the right to control the defense of its insured, based on policy wording 

that grants Underwriters “the right and duty to defend any Claim.” The relationship between policyholder, insurer 

and insurer-retained defense counsel is a tripartite relationship in which the defense counsel has two clients— 


the policyholder being defended and the insurer that retains and pays counsel. Having multiple clients creates the 

possibility of a conflict of interest for defense counsel when the insurer has reserved its right to deny coverage. 

An insurer under a duty to defend policy cannot control the defense or select counsel if doing so creates a 

potential conflict with the insured’s interests. A conflict of interest exists when an insurer reserves its rights on 

a coverage issue and the outcome of that coverage issue can be controlled or influenced by defense counsel 

retained by the insurer. For example, when a complaint contains allegations of both intentional and negligent 

conduct by the insured, it may be possible for defense counsel to steer the defense away from a finding of any 

negligent conduct. 

When such a conflict has been identified, the insured generally has the right to select independent counsel. If 

the insurer also retains counsel, both counsel provided by the insurer and independent counsel selected by the 

insured are allowed to participate in all aspects of the litigation. If multiple insureds are defendants in the same 

matter, the conflict analysis must be performed separately for each insured. The right to select independent 

counsel can be waived by the insured. 

Breach of Duty to Defend. The consequences of breaching the duty to defend vary from state to state, but can 

be substantial. Once the duty to defend has been triggered, the insurer may be subject to “bad faith” exposure 

for any failure to provide a defense. Specifically, if the insured is unable to defend the action without the insurer’s 

assistance, the insurer may be liable for any settlement or default judgment resulting from the action, even if the 

settlement or judgment includes elements that would otherwise be beyond the scope of coverage. Depending 

on the jurisdiction, an insurer who denies a duty to defend and is ultimately found to have a duty may be 

deemed to have waived all of its other defenses, including the policy limits. In addition, the insurer may be held 

responsible for any attorney fees incurred by the insured during the defense of the Claim, any attorneys fees 

incurred attempting to persuade the insurer to change its erroneous coverage determination, any other damages 

(such as business or reputational losses) caused by the insured’s inability to defend itself from the underlying 

lawsuit, as well as punitive damages. 

B. THE RIGHT TO DEFEND 

The policy not only imposes on Underwriters a duty to defend a Claim, it also gives to Underwriters the right to 

defend. Underwriters have the right to control the defense of the action against its insured, including selection of 

counsel. Defense Costs incurred without Underwriters’ approval are not covered by the policy and do not erode 

the applicable Retention. 

In furtherance of the right to defend, the policy requires the insured to provide assistance and cooperation to 

Underwriters. The policy requires that the insured, upon request, among other things, to submit to an examination 

under oath, to attend hearings and depositions, to assist in effecting settlement, or securing witnesses and 

evidence, and otherwise to aid in the investigation and defense of the Claim, all without charge to Underwriters. 

(Condition VII.E). 

C. THE RIGHT TO SETTLE 

The Policy also provides that Underwriters have “the right to negotiate the settlement of any Claim….” (Sec. II). An 

insured may not settle any Claim or admit liability without Underwriters’ consent. Failure of an insured to abide 

by this condition may be a defense to coverage. Underwriters may not commit the insured to any settlement 

without its consent. If the insured refuses to consent to any settlement recommended by Underwriters to which 

the claimant has agreed, the insured may continue defense of the Claim in the legal proceeding at the insured’s 

expense. Underwriters’ liability for the Claim is limited to the amount in excess of the Retention which they would 

have contributed had the insured consented to the settlement. 


D. THE DUTY TO SETTLE 

When a Claim triggers the insurer’s duty to defend, it also triggers a corresponding duty to settle. Courts find 

that an “implied covenant of good faith and fair dealing,” inherent in all policies, requires the insurer to accept 

reasonable settlement demands within policy limits when doing so would avoid exposing the insured to liability 

in excess of the policy limits or would otherwise prevent some injury to the insured’s interests. The breach of that 

duty may expose insurers to bad faith liability. 

Considerations related to the duty to settle arise only when the insured may be injured in some way by the 

insurer’s failure to settle. Although the potential injury is frequently a verdict in excess of the policy limits, courts 

have also held that the possibility of other consequential damages (e.g., damages to the insured’s reputation or 

future business prospects) may support a bad faith claim against the insurer. 

The duty to settle does not mean insurers are obligated to settle every case regardless of circumstances or 

reasonableness of the claimant’s demands. Rather, insurers are obligated to use the resources at their disposal in 

a reasonable manner to protect their insureds’ interests. The potential for bad faith liability applies only where the 

insurer refuses a “reasonable” settlement demand. In evaluating the reasonableness of a settlement demand the 

insurer must determine, in the light of the claimant’s damages and the probable liability of the insured, whether 

the ultimate judgment is likely to exceed the settlement offer. Whether the eventual loss has produced an excess 

verdict is determined without reference to non-covered losses such as punitive damages. 

The insurer should not allow coverage considerations to influence its evaluation of a settlement demand. Even if 

the insurer’s substantive coverage position is reasonable and would not subject the insurer to bad faith liability, 

the decision to reject a reasonable settlement demand must also be reasonable (without regard to coverage 

issues) to avoid bad faith liability in the event coverage applies. 

Insurers are allowed a reasonable time to consider a settlement demand. Settlement demands that are withdrawn 

before the insurer has had a reasonable opportunity to examine them or where the information necessary to 

make an informed decision is unavailable to the insurer are not reasonable demands. Conversely, an insurer may 

not unreasonably delay acceptance of a settlement offer. 

An “excess judgment” merely provides an inference which is favorable to the insured’s “bad faith” claim. Such 

evidence may be rebutted or overcome by other evidence showing that the insured’s estimate of liability was 

reasonable at the time it was made. On the other hand, in the absence of an excess verdict, an insurer may be 

liable for refusal to accept a reasonable settlement demand if the resulting verdict (although itself not in excess 

of policy limits) reduces the limits available to address other claims. 

The legal rules governing settlement are complex in theory, and often more so in practice. The required decision 

to settle or refuse to settle arises when none of the parties know what the result of the litigation will be, and no 

one knows for sure whether a demand is “reasonable.” 


EXCLUSIONS 

A. IMPROPER BENEFIT EXCLUSION 

The policy excludes coverage for Loss that is 

based upon or directly or indirectly arising out of or resulting from an Insured gaining in fact any personal 

profit or advantage to which the Insured is not legally entitled. 

The foregoing provision is typically referred to as the personal profit exclusion. A person is not legally entitled 

to an advantage or profit resulting from his violation of law. Courts have generally found, therefore, that loss 

under an insurance policy cannot be held to include restoration of an ill-gotten gain. Courts have reasoned 

that allowing an insured to receive coverage for such loss would encourage insureds to intentionally engage in 

unlawful activity with the purpose of reaping a benefit from such activity through insurance. Application of this 

exclusion requires not only that the individual director or officer personally benefitted from his actions, but that 

he was not entitled to the benefit he gained. (Exclusion A). 

B. CRIMINAL ACTS EXCLUSION 

The policy applies only to negligent acts or omissions. The policy therefore excludes coverage for Loss “that 

results in a judgment or final adjudication that any Insured has committed any criminal, dishonest, intentionally 

malicious, or fraudulent act, error or omission.” This exclusion is not commonly utilized as a bar to coverage 

because it requires a judgment or final adjudication to apply. (Exclusion B). 

C. PERSONAL INJURY AND PROPERTY DAMAGE EXCLUSION 

Coverage under the policy is limited to economic damages. The policy thus excludes coverage for Loss based on 

bodily injury, sickness, mental anguish, emotional distress, disease or death, or to loss of or damage to tangible 

property.(Exclusion C). 

The policy also excludes coverage for Loss or injury resulting from (1) false arrest, malicious prosecution, abuse 

of process, false detention or false imprisonment; (2) assault and battery; (3) libel, slander or defamation of 

character; (4) wrongful entry or eviction; or (5) invasion of any right of privacy. (Exclusion G). 

D. INSURED VERSUS INSURED EXCLUSION 

The policy excludes coverage for Claims brought by one insured against a co-insured, except where the Claim 

arises from failure to perform professional services for the claimant as a client. This exclusion originated to 

prevent collusion in support of claims tendered under D&O policies. Insurers sought to preclude coverage for 

collusive suits in which a corporation would sue its officers and directors in an effort to recoup business losses, 

thus converting the liability insurance policy into business-loss insurance. The policy is intended to protect against 

Claims by outsiders, not intracompany Claims. (Exclusion D). 

While the exclusion is more prevalent with regard to D&O insurance, it occasionally applies to Claims under the 

MCPL policy. In that context, application of the exclusion sometimes turns on whether professional services are 

being rendered to the claimant insured. 


E. WARRANTY AND GUARANTEE EXCLUSION 

The policy applies to Loss as a result of a Claim based on a negligent act or omission. Consistent with that scope 

of coverage, the policy excludes coverage for Loss resulting from the breach of an express warranty or guarantee. 

Claims for breach of warranty and guarantee typically do not fall within the insuring agreement because they 

are based on contractual obligations rather than on negligence, which is the basis for coverage under the MCPL 

policy. (Exclusion K). 

F. NON-MONETARY RELIEF EXCLUSION 

The policy covers the insured’s Loss, which is defined to include money damages. Consistent with that scope of 

coverage, the policy also excludes coverage for loss related to injunctive relief, or redress in any form other than 

money damages, including disciplinary proceedings. Under the MCPL policy, Claims may be brought against 

insureds, for example, by claimants seeking equitable remedies such as restitution or declaratory relief rather 

than damages. The exclusion bars coverage for such Claims. (Exclusion J). 

G. TERMINATION EXCLUSION 

Coverage under the policy applies only to Claims first made against the insured during the policy period. The 

policy therefore expressly excludes coverage for facts, circumstances, situations, events and transactions that 

were the subject of a Claim or notice on a prior policy, or that would cause a reasonable person to believe that a 

Claim for a Wrongful Act might have been made during a previous period. (Exclusion O). 

H. CIVIL RIGHTS EXCLUSION 

The policy excludes coverage for loss “directly or indirectly arising out of or resulting from any violation of any 

civil rights laws, including but not limited to discrimination by the Insured on the basis of age, color, race, creed, 

sex, size, national origin or marital status.” (Exclusion P). 

This exclusion is implicated under the MCPL policy, for example, by Claims by minority borrowers who allege 

that mortgage lenders engage in discriminatory practices or by elderly claimants who claim that lenders have 

exploited them based on age. 

I. CONTRACTUAL INDEMNITY EXCLUSION 

The policy excludes coverage for loss “directly or indirectly arising out of or resulting from any actual or alleged 

assumption by the Insured under any contract or agreement of the liability of others, unless such liability would 

have attached to the Insured in the absence of such a contract or agreement.” Coverage under the policy does 

not apply when the insured’s alleged liability arises from its contractual agreement to assume the liability of a 

subsidiary company or other entity. (Exclusion Q). 

J. ADVERTISING EXCLUSION 


advertising or solicitation activities of an Insured.” This exclusion commonly applies to Claims by borrowers 

alleging misrepresentations by the insured in advertising for or soliciting business, Claims between mortgage 

brokers alleging unfair competition or Claims alleging violations of the Telephone Consumer Solicitation Act. The 

exclusion bars coverage for any such advertising or solicitation Claims. (Exclusion T). 


K. GOVERNMENTAL ACTION EXCLUSION 

The policy excludes coverage for Claims “brought for or on behalf of any governmental authority, quasigovernmental 

authority or other regulatory authority or agency, except when acting in the capacity of a customer 

or client of the Insured or on behalf of a customer or client of the Insured and when such CLAIM arises from 

Professional Services rendered or that should have been rendered to such authority or customer or client.” 

This exclusion is implicated when governmental or quasi-governmental entities file actions against the insured for 

violations of rules and regulations, or target the insured for investigation, e.g., an SEC subpoena for documents. 

Agency subpoenas are not covered because they are not a Claim, do not seek damages, and involve governmental 

action barred from coverage by this exclusion. (Exclusion V). 

L. LOAN SERVICING EXCLUSION 

The policy excludes coverage for loss “directly or indirectly arising out of or resulting from (1) collecting, receiving 

or recording payments on mortgage loans, (2) establishing or administering tax or insurance escrow accounts on 

mortgage loans, (3) managing real property owned by or under the supervision or control of an Insured, or (4) 

performing any other acts related to (1), (2) or (3).” 

This exclusion is standard on the MCLP Policy form, but the coverage is frequently bought back by endorsement 

when coverage is provide to mortgage bankers who also engage in the loan servicing business. (Exclusion W). 

M. LOAN REPURCHASE EXCLUSION 


duty to repurchase a loan.” 

The loan repurchase exclusion was added to the MCPL policy to address a high volume of Claims by investors 

who purchased subprime loans from insured mortgage lenders. It applies, for example, when investors claim 

that insureds are obligated contractually to repurchase loans based on early payment defaults or alleged nondisclosure, 

misrepresentation, fraud or other acts by the borrowers. This exclusion excludes coverage for Claims 

based on such repurchase obligations. (Exclusion X). 

N. LOAN SALES CONTRACTUAL INDEMNITY EXCLUSION 


breach by an Insured of an agreement to hold harmless or indemnify an investor, purchaser or lender in connection 

with a loan originated, made, held or sold by an Insured as mortgage broker or mortgage banker.” 

This exclusion was added to the MCPL policy crisis to address the flood of contractual demands from purchasers 

of subprime mortgage loans. When investors demand that the insured indemnify the investor from loss due to 

breach of the terms of the loan purchase agreement, the exclusion precludes coverage. (Exclusion Y). 

O. INVESTMENT LOSS EXCLUSION 

The policy excludes coverage for loss “directly or indirectly arising out of or resulting from depreciation (or the 

failure to appreciate) in value of any investment transaction, including real property, securities, commodities, 

currencies, options and futures, or any actual or alleged representation, advice, guarantee or warranty provided 

by or on behalf of an Insured with regard to the performance of such investment.” 

The policy applies Claims for money damages resulting from negligent acts or omissions. It does not apply to 

claims for depreciation or losses in real estate values, or in other investments such as securitized mortgages. The 

exclusion bars coverage for such investment losses. (Exclusion AA). 


P. TILA EXCLUSION 

The policy excludes coverage for loss 

directly or indirectly arising out of or resulting from any actual or alleged (1) non-disclosure, concealment, 

misrepresentation, misstatement or falsification of any terms of a loan, or of any rights or information required 

to be disclosed or revealed under TILA; or (2) improper, excessive, illegal or unauthorized fees, penalties or 

costs, including but not limited to prepayment penalties. The term “TILA” means, for the purposes of this 

Exclusion, the Truth-in-Lending Act of 1968, Title I of the Consumer Credit Protection Act as amended (15 

USC § 1601 et seq.) or Regulation Z (12 CFR Part 226). 

Mortgage borrowers seeking to prevent foreclosure sometimes assert retaliatory Claims alleging predatory 

lending practices. Such Claims, which were especially prevalent during the subprime mortgage crisis, typically 

allege fraudulent misrepresentations of loan terms and violations of statutes, such as TILA. TILA claims are 

advantageous for insureds because they did not require proof of intent to establish liability. The exclusion 

effectively bars coverage for such Claims. Such Claims are no longer prevalent given substantial changes in 

the real estate lending market since the sub-prime crisis. Also, portions of TILA which permit the recovery of 

damages are subject to a one year statute of limitation. (Exclusion BB). 

Q. REAL PROPERTY OWNERSHIP EXCLUSION 

The policy excludes coverage for loss “directly or indirectly arising out of or resulting from any transaction (1) 

involving real property in which any Insured or any affiliate of any Insured has or acquires a direct or indirect 

ownership or financial interest, or (2) involving a lease or property in which any Insured or affiliate of any Insured 

has a direct or indirect ownership or financial interest.” The coverage applies to negligent acts or omissions by 

the insured, not to Claims involving the insured’s investment in or interest in real estate. (Exclusion EE). 

R. BANKRUPTCY EXCLUSION 

The policy excludes coverage for loss “directly or indirectly arising out of or resulting from the insolvency or 

bankruptcy of any Insured or of any other entity including but not limited to the failure, inability, or unwillingness 

to pay Claims, losses, or benefits due to insolvency, liquidation or bankruptcy of any such individual or entity.” The 

bankruptcy exclusion in commonly invoked under D&O policies, since shareholder actions are often triggered by 

bankruptcy. It is not commonly implicated under the MCPL policy. (Exclusion FF). 


COMMON ENDORSEMENTS 

In addition to the standard exclusions, the MCPL policy often incorporates endorsements that further define the 

scope of coverage provided. The following are common endorsements that supplement the MCPL policy form. 

A. YIELD SPREAD ENDORSEMENT 

This endorsement excludes coverage for loss arising from: (1) yield spread premium; (2) kickback; (3) improper 

split of charges; and (4) improper payment of compensation for the referral of settlement service business in 

connection with any mortgage lending transaction. The endorsement bars coverage for losses arising from such 

actions because they arise not from allegedly negligent acts, but rather are based on deliberate acts that are 

excluded from coverage throughout the policy. 

B. DISCOUNTED LOAN LOSS ENDORSEMENT 

This endorsement modifies the loan repurchase exclusion (Exclusion X). It allows limited coverage for “discounted 

loan loss,” where: 

(1) the insured sold and is legally liable to repurchase the loan as a result of a Claim within the policy period 

and after the retroactive date, and 

(2) the insured repurchases and the resells the loan. 

However, the endorsement excludes coverage it the applicable loan is in default or foreclosure, or payments are 

not current, or any loans where the insured has not “made diligent efforts and taken all reasonable actions to 

correct any problem with the loan that is the subject of the Claim.” 

The endorsement defines the “discounted loan loss” as the original loan principal amount less: (a) all payments 

that have or should have been applied to the principal, and (b) the sale price received by the insured upon 

reselling the loan, excluding costs incurred to correct loan problems and resell the loan. The endorsement also 

limits coverage (usually $100,000) for the entire policy period, regardless of the number of Claims. 


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