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TULSA, Okla. — I've been working in the insurance industry for more than 30 years and I've spent the last 12 years providing insurance to collateral recovery agents throughout the United States. Recently, I have seen a rise in lawsuits against recovery specialists for violation of certain state consumer protection acts as well as the Fair Debt Collection Practices Act.

While recovery agents are technically not debt collectors, legal action of this type is increasing. The alarm bell needs to be rung now for collateral recovery industry because most have never heard about it.

Professional recovery companies carry general liability insurance. However, general liability insurance may not protect them against certain violations of FDCPA, consumer protection acts, improper disclosure and other federal statutes. 

Plaintiff attorneys are trying to treat the recovery agent as though they are third-party collectors and suing for damages, as such. Recovery agents may be included in lawsuits directed at lenders.  This may not be covered under general liability/wrongful repossession policies.

Another aspect of the problem is that recovery agents are also signing contracts that hold the lending institutions harmless — regardless of fault.

In the past, lending institutions held the recovery agents harmless. Now this protection has largely been reversed. Debt collectors carry errors and omissions insurance and recovery agents should consider this as well.

The debt collectors' E&O coverage provides the legal defense and pays damages with a different coverage trigger than a traditional general liability policy (wrongful repossession).

This type of litigation is becoming more frequent. Attorneys are using the lending community and recovery agents as scapegoats. Attorneys are mainly pursuing lending institutions, but recovery agents are being used as collateral damage. Recovery agents need to protect their business and themselves by carrying E&O insurance and refusing to sign contracts that hold lenders harmless.

For example, let's say a bank accidentally makes a mistake and doesn't apply a debtor's payment to their loan. The bank hires a recovery agent to recover the debtor's collateral. The recovery agent recovers the collateral successfully and never encounters the debtor before, during or after the recovery.

Then, the debtor's attorney sues the bank (and recovery agent, joint and several) alleging violations of the FDCPA. E&O liability insurance does cover this claim, but general liability insurance may not (depending on the allegations). Now to add injury to insult, what if the bank (which the recovery agent held harmless) goes out of business? The recovery agent is held responsible for the damages all by himself.

What Should Recovery Agents Expect to Spend?

A policy that has a million dollar limit and a $5,000 deductible on average will cost $3,500 to $10,000 a year.

This type of litigation is unethical and unfortunate. However, you can protect yourself and your business by carrying E&O insurance and refusing to sign contracts that hold lenders harmless.

Jim Deason is the founder and owner of Recovery First Insurance, an insurance company that insures more than 200 collateral recovery agents in the United States. Deason began his career more than 30 years ago at Farmer's Group Insurance. In 1985, he started his own business and became a certified insurance counselor in 1991.