Professional liability insurance programs should be narrowly tailored to the insured. Every industry is unique and no two businesses are the same. A professional liability insurance policy should reflect the specific needs of the insured and help to promote growth in the industry. Many traditional insurers offer policies that cover multiple lines of business. This is an inefficient use of coverage. We see the same inefficiencies in the cable television market. The telecom carriers require you to pay exorbitant fees for hundreds of channels you never watch just so you can have ESPN.
A solution for this is for a group of lenders to create a captive insurance program. Professional liability is one of many types of coverages a captive can provide. In short, a company or group of employers can create a subsidiary insurance company which provides professional liability insurance coverage for the parent(s). This type of insurance is designed to serve the interests of the owners of the company, not the insurance carriers. This means that smart underwriting and proper risk management will result in a profitable captive.
The Captive Insurance Solution
The captive solution presents the most cost efficient resolution to common issues. Professional liability issues arise when employees or related parties fail to perform professional services in compliance with established rules and regulations (federal law, state law, industry best practices, etc.) In some instances, professional liability is considered malpractice and the premiums are very high to insure against potential claims. In other industries, professional liability insurance is referred to as errors and omissions insurance. Either way, an insurance policy will refer to the coverage as professional liability insurance.
Banks and mortgage brokers often purchase professional liability insurance that fails to meet their needs. For example, take a case where a mortgage broker receives documents from a prospective buyer who forges bank statements and tax returns. If the borrower then defaults then the mortgage broker may bear professional liability if the bank decides to bring action against the mortgage broker. This common error is a prototypical liability for a captive insurance program.
While policies from traditional carriers carry coverage for this type of exposure, brokers with modest loss histories are likely overpaying their annual premium. This is because traditional carriers expect “good risks” to subsidize the “bad risks” in order to justify the premiums. The reality is that “good risks” can secure professional liability insurance narrowly tailored to the specific risks of the insured’s business through the use of a captive.
Rather than subsidize bad risks and pay for unnecessary coverage, mortgage brokers can utilize a captive solution to secure appropriate coverage at a better rate. This is not cheap insurance; rather, it simply culls out a panoply of middlemen and turns a company’s cost center into a profit center. Since captive insurance companies are owned by the insured parties, mortgage brokers have an extra incentive to install risk management programs to keep professional liabilities premiums to a minimum. The fewer claims paid out by the captive, the more profitable the captive insurance company.
Professional liability is a common exposure for all mortgage brokers. If one company does not believe that setting up a single parent captive is an appropriate solution, there a number of alternative ways to accomplish the same goal. For example, a number of mortgage brokers can create a group captive, they can purchase cells in a protected cell, or a large group of related parties could even found a risk retention group to provide customized insurance.
There is no reason to overpay for insurance. Whether in the lending industry or in the medical market, exposure is a manageable risk. Through the use of a captive insurance solution, you can take control over the risk at a profit.