SW Legal studies in Business

Intentional Misreporting of Information Negates Duty to Defend Mortgage Broker

Appeals court held that a mortgage broker that falsified credit scores on mortgage applications, and was forced to indemnify lenders for making bad loans, was not due coverage from its liability insurance policy as the actions fell under the fraud and dishonesty exclusion.

Topic Insurance
Key Words

Errors and Omissions Policy; Fraud Exclusion; Duty to Defend

C A S E   S U M M A R Y

New Fed is a residential mortgage originator and broker that takes mortgage applications and presents the applications to lenders for approval. When a mortgage is accepted, New Fed receives a fee for arranging the loan. Agreements with lenders stated that New Fed “warranted the accurateness and the truthfulness of all information” it passed forward and that New Fed would indemnify for losses incurred due to breach of that obligation. A lender approved mortgages from New Fed that an audit later showed to contain false credit reports. As the lender lost money on the mortgages, it demanded New Fed cover the losses. New Fed demanded its insurer, National Union, cover the losses under its errors and omission policy. An E&O policy insures against liability arising out of mistakes inherent in the practice of a particular business. The policy excluded from coverage any claim alleging fraud or criminal acts. National refused to pay, contending that the intentional provision of false credit reports relieved it of liability. New Fed sued. The district court held for National. New Fed appealed.


Affirmed. The credit scores reported by New Fed to the lender had been altered by New Fed employees to reflect higher scores than were true. This practice by New Fed fell within the fraud and dishonesty exclusion in the E&O policy, so National had no duty to defend New Fed or indemnify it for its losses.


New Fed Mortgage Corp. v. National Union Fire Insurance Co., 543 F.3d 7 (1st Cir., 2008)

Back to Insurance Listings

©1997-2009  South-Western Legal Studies in Business, A Division of Cengage Learning. All Rights Reserved.