Editor’s note: This is the second in a series of articles covering actual Notary errors and omissions (E&O) claims that did not go as anyone expected.
A Notary was sued for negligence and fraud. The negligence claim was dismissed. The fraud claim survived. The lawsuit wasn’t over.
That, in short, is what happened to a Notary Public who testified truthfully about a notarization in bankruptcy court and then had to defend a retaliatory lawsuit.
In the first article in this series, about a Notary sued by a disinherited son, doing everything right wasn’t enough. Here, successfully defending against the covered claim wasn’t enough.
How the lawsuit started
The borrower signed mortgage loan documents. The Notary verified the borrower’s identity, notarized the signatures, and moved on.
Years later, after the borrower defaulted on the mortgage, the bank began foreclosure proceedings. The borrower responded with a series of bankruptcy filings designed to delay the process. Eventually, the bank sought relief in bankruptcy court. The Notary was called to testify about the loan signing and did exactly what any Notary should do. The Notary appeared, answered questions, and told the truth.
That should have been the end of it. Instead, the borrower turned around and sued the Notary.
When the case turned
The borrower (plaintiff) alleged the Notary committed negligence and fraud. At first, that distinction may not sound important. It turned out to be everything.
The borrower represented herself throughout the litigation. Unlike most parties to a lawsuit, the plaintiff had no attorney and therefore incurred no attorneys’ fees. She filed motion after motion, each requiring a response from the Notary’s attorney. Every court appearance generated defense costs for the Notary while costing the plaintiff nothing in attorneys’ fees. The plaintiff’s claims were intended to harass, malign, and retaliate against the Notary for her testimony in the bankruptcy proceeding. Lawyers have one word to describe this type of plaintiff: “vexatious.”
The Notary’s counsel moved to dismiss both claims. The court ruled that the plaintiff’s allegations, even if true, did not establish negligence and dismissed that claim with prejudice. The bad news was that the borrower was allowed to amend the complaint and state additional facts in support of the alleged fraud claim and try again.
Suddenly, the case looked very different. Negligence claims are generally what an E&O policy is designed to protect against. Fraud claims are not because they involve intentional acts, which E&O policies do not cover. The lawsuit had shifted from one side of the coverage line to the other.
The E&O eye-opener
Most Notaries understand that an E&O policy has a dollar limit. What many do not realize is that an E&O policy does not cover every claim that can be brought against a Notary.
By the time only the fraud claim was left, the Notary’s $25,000 E&O policy had already been exhausted defending the negligence claim. Defense costs were elevated by the vexatious plaintiff. The insurer successfully defended the claim that the policy was designed to cover. What remained was a fraud claim that fell outside the policy’s coverage. The outcome would not have been different had the Notary purchased a larger policy. The surviving claim was simply not one the policy covered.
Nevertheless, the irony is hard to miss: The Notary successfully defended against the covered claim and still ended up exposed. The fraud claim remained, and it was not a claim the E&O policy covered.
That is what makes this claim an eye-opener. The danger was never that the negligence claim would succeed. The danger was that the case would survive long enough to reach a claim the policy did not cover.
The Notary represented herself in defense of the fraud claim, and the good news is that eventually, the plaintiff dismissed the claim.
The takeaways
No Notary expects to prevail on a covered claim and still be defending the lawsuit. But that is exactly what happened here. Here are several lessons every Notary can take from it.
- Understand what your E&O policy covers — and what it does not. Many Notaries focus on policy limits. Just as important are policy exclusions. Fraud claims are typically excluded, and that distinction mattered in this case.
- Know that dismissing one claim does not end a lawsuit. The negligence claim was dismissed, but the fraud claim remained. A legal victory on one issue does not always close the case.
- Remember that coverage and litigation are not the same thing. A lawsuit can continue long after the covered claim is gone. What remains may be a claim the policy does not cover.
- Keep thorough records from the start. The negligence claim was dismissed because the defense had the facts to challenge it. The stronger the Notary’s records, the stronger the defense.
- A higher limit policy wouldn’t have changed the outcome. The surviving fraud claim simply was not covered.
Bill Anderson is Vice President of Government Affairs at the National Notary Association.