Eight Circuit Confirms Blanket Bankers Bond Does Not Cover Bank's Losses

In a recent case, Ohio Savings Bank (“OSB”) sought indemnity for losses under a bankers blanket bond issued by Progressive Casualty Insurance Co. (“Progressive”).  OSB incurred losses after buying loans which went into default as the result of the actions of the party who had sold the loans to OSB.    The Eighth Circuit confirmed this month that the blanket bond did not cover the losses.

The bond did not cover losses resulting from normal lending activities, but there were two exceptions to the exclusion.  OSB argued that the losses were covered under a rider entitled, “Fraudulent Mortgages Insuring Agreement (‘FMIA’),” and that the losses were covered by “Insuring Agreement (E).”  The Eighth Circuit rejected both arguments.

Regarding FMIA, the Eighth Circuit limited application of FMIA to cover losses from a mortgage “defective by reason of the signature thereon,” which failed to provide a security interest because the mortgagor was tricked or defrauded as to the nature of the document signed.  As the borrowers admitted that they understood they were signing mortgages to encumber their property, the mortgages were not defective.  Thus, OSB was not covered for losses which resulted simply by the borrowers’ refusal to pay their mortgage notes.

With regard to Insuring Agreement (E), this provision was held to cover losses resulting when an instrument is lost or stolen from its rightful owner and then used to persuade a bank to extend credit.  As the mortgages in question were the borrowers’ mortgages, and the original documents were not lost until after OSB relied on what was assigned in extending credit to the borrowers, OSB’s losses were not covered.  The Eighth Circuit held that losing collateral documents after a loan was made is precisely the sort of practice that is excluded from coverage by a bankers blanket bond.