Bank-Owned Property Exposures – REO

The insurer Zurich just released a “white-paper” on the topic of the liabilities faced by banks on Real Estate Owned properties (REO).

Sorry Zurich but your piece is short on real help for banks.  Seems more like a marketing piece than a white paper.

Here’s some actual help for banks.

There are three main exposures banks face in liability from an REO property.

First there is the bodily injury / property damage exposure.  A kid is playing in the yard of a house your bank owns.  He falls into the well.  Your bank will be sued for that.  A real estate agent is injured showing the house to a potential buyer.  Again, get ready for letter from a lawyer.

The coverage for this exposure belongs on the bank’s general liability insurance policy – the same policy that covers the bank branches and parking lots from similar lawsuits.

Many banks buy a separate general liability policy for REO properties.  The bank typically does not get the advantage of the umbrella liability policy with this approach.  I push my clients to have $5, $10 or $20 million in umbrella liability insurance (depending on asset size).  Having REO general liability separate from the bank’s package insurance policy usually means you don’t get umbrella liability.

Many insurers don’t like the above approach.  It is the best way for the bank though – that is what I care about.

Second issue is pollution cleanup and liability.  As the Zurich paper points out, your bank’s insurance program probably does not cover pollution.  It doesn’t cover the cleanup and it does not cover liability arising out of pollution.  Banks should be diligent about understanding the pollution issues of properties they are taking over.  Sometimes you’ll be better off walking away from a property rather than taking on pollution cleanup.

The third issue involves construction defect in development projects. These claims arise when the bank forecloses and resells development projects.  The subsequent buyer may try to bring the bank into litigation claiming improper construction techniques.

Insurance coverage for construction defect does not exist in your executive risk insurance.  Coverage is also not included in your general liability insurance.

Risk management tactics can include contractual indemnification clauses in your contract of sale of such a project.  Some banks are moving forward with a separate LLC or corporation to hold REO properties, this insulating the assets of the bank from litigation.  Obviously this is an issue for your attorney.

There, specific direction on three issues for REO liability exposures – using 1/5 the words Zurich used.

Class dismissed.