"You mean it doesn't?" they'll say in disbelief, Mr. Wallace reported, after he and other panelists revealed the huge amount of fraud--particularly mortgage fraud--that has emerged during the economic downturn, making the misunderstanding about coverage even more problematic right now.

David DiBiase, a managing partner with Los Angeles-based law firm Anderson, McPharlin & Conners LLP, said "simply because a crime has been committed does not mean there will be coverage available for the consequent loss under a crime policy."

Unlike professional liability insurance, crime insurance policies and financial institution bonds are not third-party coverages, he stressed. "These are first-party products. They provide first-party indemnity [only] for specified perils."

The two insuring perils common to most crime insurance policies and bonds are: employee dishonesty, covering situations where an insider has something to do with the fraud, and "securities extended forgery," covering losses sustained in connection with loans.

"It's limited to forged documents of a specific type [and] there are a lot of terms, conditions and limitations," he said, explaining that even if a mortgage loss is tainted with a forged document, it might not be covered under that second insuring agreement.

Explaining reasons for the limitations and the general intent of the policies, Mr. DiBiase said they exist to provide for frauds "that ordinarily are not discerned through the course of due diligence and good banking and lending practices."

He illustrated the point by showing a clip from the movie "Fargo" depicting a lender calling a loan recipient for the identification numbers of vehicles he used to secure a loan--after paying out the money.

"Documentation to follow" is not a prudent lending practice, and while the lender may believe he has coverage under a financial institution bond because the loan documents reflected non-existent vehicles, insurers don't intend to cover lenders for poor risk management, he explained.

He went on to provide an extensive list of fraud situations where mortgage lenders find no coverage under their crime policies:

o Inflated or fabricated income on a mortgage loan application

o Borrower lies about assets or net worth

o Untruth about whether the home is owner occupied

o A husband signs a loan application and gets the wife's signature forged

o Falsehood about source of down payment, like a photocopied bank statement with some "zeros added to the left of the decimal point"

o False or inflated appraisal

While many PLUS attendees in the audience believed the forged signature situation would be covered, Mr. DiBiase said none of these are covered.

"We don't cover crime through falsehoods on loan applications unless you have an employee that is doing the lying," he said.

Edward Gallagher, general counsel for the Surety & Fidelity Association of America, who moderated the panel, kicked off the session by reading off several news headlines from around the nation about "fraud-for-profit" mortgage schemes, involving the use of straw buyers and phony appraisers. These are different from "fraud-for-housing" schemes, where loan applications are falsified by individuals who want to live in the houses for which they seek loans, he said.

In the "for-profit" schemes, the fraud architects concoct scams to raise the price of a house well above the true value, get loans for the inflated values, pay legitimate sellers the real value and pocket the difference.

Mr. Wallace underscored the extent of the mortgage fraud problem by presenting statistics from the Financial Crimes Enforcement Network, a unit of the department of Treasury.

Statistics for suspicious activity reports (SARs) from depository institutions involving mortgage loan fraud compiled at the end of 2006 revealed a 1,000 percent increase from SARs between 1997 and 2004, with the figures rising from 1,620 to 18,391, Mr. Wallace noted.

"This is still a problem today, he said, revealing that the 2008 report showed the SARs ballooning at least 20 percent each year since 2004--to over 64,000 in 2008.

Insurance brokers on the panel also discussed the proliferation of Ponzi schemes, like the one perpetrated by Bernard Madoff, also revealing a lack of coverage under first-party crime policies and financial institution bonds.