This article is my opinion as a judgment broker, based on my experience in California, and laws vary in each state. If you ever need legal advice or a strategy to use, please contact a lawyer.
Anyone with a new judgment recovery or debt collections business thinks at least once about what kind of insurance they should buy. There are risks in any business, and the risk of being sued is one of the most important risks to consider. A judgment enforcement business can have at least five additional (although very rare) risks, in addition to the normal risks of any business or venture:
1) What if you become disabled, or die, or exit the judgment business and do not assign most or all judgments back to the original judgment creditors? You or your executors might get sued, and even worse, sued for the creditor’s share of an overly optimistic and purely theoretical value of the judgment.
2) Letting a judgment expire on your watch. Judgments must be renewed, if one does not renew a judgment, it is lost. Again, an original judgment creditor could try to sue you, for a way too optimistic and theoretical judgment value.
3) FDCPA and FCRA violations. Judgment enforcers must be aware of all laws. Being discreet, having common sense, staying polite, and taking care not to accidentally or purposely notify third-parties about the debtor’s debt, covers you on most of the laws. If you violate a law, the debtor could hire an aggressive lawyer, and sue you for much more than the judgment’s face value.
4) Having the Sheriff levy the wrong person’s bank account. Because courts do not usually put judgment debtor’s dates of birth and social security numbers on judgments, debtors with common names can be a problem. Also, identity-theft can make the wrong person show up as the debtor.
It can take a lot of time to verify things, when someone claims you had the Sheriff levy the wrong person as the debtor. Most that claim they are not the debtor will be angry, and about half of those people will be lying because they are actually the judgment debtor.
If you do have the Sheriff levy the wrong bank account, immediately refund to the mistaken judgment debtor the amount taken, their banking and bounced check costs, and something extra for their trouble – enough extra to make them happy. One suggestion is three times their costs, or $100, whichever is more.
5) Unreasonable or insane original judgment creditors. Some never will understand the costs and difficulties of judgment recovery. Some might try to sue you if you settle too low, do not challenge a debtor’s bankruptcy, lose a motion to vacate the judgment – even when it is not your fault, or your action or inaction was the correct thing to do. Even if the original judgment creditor has no valid reason to try to sue you, it could happen.
While one may be sued, for one of the possibilities listed above, it is usually rare that the party suing you would prevail. However, lawsuits are always expensive, time consuming, and a hassle.
Insurance almost never covers you when you intentionally avoid your responsibilities. If you die or become disabled, this becomes a preparation and behavior issue, not an insurance issue. Your executors should know they should assign your judgments back to the original creditors, unless you have a better way to have the judgments handled.
In a judgment business, you are more likely to be sued, long before you become disabled or die. Often, the only insurance you would want is to cover you if you got sued. The kind of insurance that usually comes to mind is Errors and Omissions (E and O) insurance.
E and O insurance is common in most businesses, however it is more difficult to get in a judgment recovery or collection business, partly because most insurance companies do not fully understand these kinds of businesses. Some companies, such as TracersInfo.com, sometimes require E and O insurance for new customers. Tracers wants to see the following:
Locking file cabinet, All doors providing entry to the office must have a lock, and if door has access to outdoors, they prefer it have a deadbolt in addition to standard knob lock, Shredder, Business license on display, Business card readily available (they take one), Computer with encryption, Locking windows (if applicable), No signage (including on vehicles), and a printer.
There may be a point that because most judgment enforcers are sole proprietors working from home, representing themselves, their homeowners insurance would cover them for “personal liability” resulting from their ownership of judgments. Home insurance policy sales people do not brag about this, and most are not even aware of this, however the details of the policy in many cases support this. (I am not an insurance or legal expert.)
If that last paragraph does not seem right, or if you use a business office, your homeowner’s insurance policy is off the table. Forget about using a bond, unless it is required by law, or by someone you are doing business with. Bonds do not protect you, they protect the general public against loss. You must pay the bond premiums, and then you have to pay the bond company every time a claim is filed.
You may might want to get E and O insurance, if only to satisfy the requirements of some data providers. If you search, you can find E and O insurance providers for a judgment or collection business. (One of the cheaper places I have found is at www.rlicorp.com). Such insurance is sometimes expensive, and if you get sued, you have to immediately pay the deductible, which is expensive. The insurance company handles the lawsuit, not necessarily with the goal of protecting your name and business. Even if the lawsuits are frivolous, you still have to pay. Another disadvantage is if you get sued, you must let your insurance company defend you. You pay, yet do not get to control your defense to such a lawsuit.
Another problem with having E and O issuance is that it could place a “bulls eye target” on you. Some may believe that if you have E and O insurance, you have deep pockets. Most of the valid reasons one can be sued can be drastically reduced if you learn the law, assign judgments back when appropriate, you are reasonable, and do not let judgments expire on your watch.
Unless you need E and O insurance for a data provider, or for someone you are doing business with, you might save money with your actions, attitude, and your willingness to hire a good lawyer if you get sued. Most of the time, if you are careful, and get sued once in a while for oversights and mistakes, or for frivolous reasons, what you pay a lawyer over the long term will be less than the long-term cost of having E and O insurance.
As mentioned before, E and O insurance can make one a target. If you are sued with a frivolous lawsuit, it might be a good idea to ask the other side’s lawyer who their E and O insurance carrier is?, knowing that E and O claims are expensive and must be paid immediately. Also, much of the FCRA and FDCPA law applies mostly to consumer debts such as credit cards and car loans.