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Potential E&O Exposures for Real Estate Professionals


Potential E&O Exposures for Real Estate ProfessionalsThe use of wire transfers and the Automated Clearing House (ACH) Network are used to handle real estate transactions between businesses and individuals. Real estate agents, brokers, property managers, title agents, escrow agents, mortgage brokers and bankers all have access to personal and financial data of their clients with wire transfers and ACH instructions – information that has become increasingly at risk for fraud and deception. In fact, scammers and hackers have become increasingly adept at siphoning money out of the bank accounts of unsuspecting victims.

Fraudsters only need two pieces of information to pull off ACH fraud: a checking account number and a bank routing number. They typically obtain the information with a targeted phishing email that dupes the victim into running malicious software, which then allows criminals to install key-logging software and steal bank account passwords. Other techniques involve the scammer posing as someone else to obtain the personal information. Following are a couple of claim examples illustrating the extent of this exposure:

A real estate agent sends an email to a title agent with instructions on where to wire money to close the real estate deal. The title agent feels comfortable wiring the money as he has received hundreds of emails from this individual in the past and processed closings without any issue. But this time it’s not the real estate agent requesting the money but a hacker who requests the money to be wired to a fictitious account, where it remains for 30 seconds before going to an offshore account. Depending on the source of the breach, liability would be on the part of the real estate agent or title agent.

Another claim involved a closing agent receiving a full closing document with the loan number, name and company name on company letterhead from the title agent. There was one problem: none of it was real and $400,000 was wire transferred – never to be seen again.

Best Practices to Implement

To help stem the potential of these types of losses, regardless of the number of times parties have communicated via email, mail or phone with you, be sure that all wire transfer/ACH instructions involved in real estate transactions are verbally verified. Also, ensure that your employees know the e-mails of everyone and that they are extremely cautious of e-mails requesting funds. Again, call the client to verify that he or she indeed sent the email. Adjust your servers to filter bogus e-mails. Also, guard the passwords to your e-mails carefully and change them on a regular basis.

In addition, speak to a professional insurance advisor to review the type of insurance coverage you need to respond to a loss involving transferring funds to a fraudulent source. Many commercial crime policies will exclude coverage for this type of risk as the insured did the actual transfer and someone didn’t steal the money right out of the account. Moreover, not all cyber policies will cover email fund transfer fraud if the policyholder didn’t follow the Uniform Commercial Code, which requires a procedure that includes a callback and encryption. An Errors & Omissions insurance policy may address this type of loss for employee negligence, depending on the specific circumstances.

Axis Insurance Services specializes in E&O Insurance, Cyber Liability, Crime, Directors & Officers, and Fiduciary insurance, and would be happy to review the various cyber risks that exist today and how to best address them. Give us a call at (877) 787-5258.

 

 

 

 

 

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Blogged on: July 27, 2015 by Mike Smith
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