Pub. 15 2020-2021 Issue 2

WWW.NEBANKERS.ORG 16 L ENDER LIABILITY IS WHEN A LENDER IS ALLEGED TO HAVE violated a duty of good faith and fair dealing owed to the borrower. Approximately 40% of directors and officers (D&O) policy claims paid fall under the lender liability insuring agreement of the policy. Almost half lender liability paid claims are brought forth by commercial borrowers because of the complexity of commercial lending. Most lender liability complaints are filed against the bank entity, but individuals can also be named. All lender liability policies have different insuring agree - ments, different triggers, and different exclusions. Perhaps the biggest difference between lender liability policies is between standard and broad-form lender liability policy forms. • A standard lender liability endorsement formon a bank’s Management Professional Liability (D&O) policy covers suits brought by borrowers and guarantors only. • A broad-form lender liability endorsement form on a bank’s Management Professional Liability policy covers suits brought by borrowers, guarantors and other third parties such as other financial institutions, contractors, spouses, etc. The most common lender liability complaints against a bank involve matters of breach of contract, fraud, breach of the im- plied covenant of good faith and fair dealing, breach of fiduciary duty, negligence, economic duress andmisrepresentation. These claims include: • Wrongfully refusing to honor a loan commitment. • Wrongfully refusing to honor an alleged “side deal” that is not clearly spelled out in the loan agreement. • Wrongfully refusing to renew a loan. • Negligently processing or administering a loan. • Misrepresenting information about a borrower in re - sponding to credit inquiries. • Threatening to take enforcement actionwhich the lender does not carry out, but which causes the customer to act to their detriment. • Improperly foreclosing a deed, trust, mortgage or se- curity agreement without giving the required notice or otherwise following proper statutory procedures. • Selling a borrower’s collateral for less than its fair mar - ket value. • Interfering, to the borrower’s detriment, with a bor - rower’s day to day management or contractual relations with third parties. • Breaching a fiduciary duty that may have arisen or that a lender may have assumed either purposely or inadver- tently with respect to the borrower. • Violation of consumer lender laws or regulation. The type and frequency of lender liability claims are constant - ly increasing, especially in our current economic climate. Many borrowers are no longer accepting foreclosure as a consequence of their inability to repay the loan. Often, a countersuit is filed stating the bank took advantage of the unsophisticated borrower by making them agree to terms they did not understand. In ad - dition, borrowers are also alleging the lender violated certain Mitch Florea, Vice President of Marketing, NBISCO Lender Liability — The Basics of a Management Professional Liability Policy