We all know that insurance is a regulated industry. The regulator is typically afforded great deference by the courts in addressing issues central to the regulator’s role. One of those central roles is in the setting of insurance rates. A policyholder pays a premium for the insurance policy it purchases. That premium is calculated based on rates that are generally filed with and approved by the insurance commissioner in the insurance company’s state of domicile. For some lines of business rates have to be filed and approved in advance and for others rates are filed by the insurance company and may be used after a waiting period and no action by the regulator. Of course there are permutations to all of this.

What happens when an insurance company issues a policy charging its policyholder a premium based on filed and approved rates and that premium is subsequently challenged as being being fraudulent? In a recent case from the Second Circuit Court of Appeals, the court, in an opinion written by a former insurance lawyer, Judge Dennis Jacobs, held that the filed rate doctrine barred the claim and dismissed the case.

The case arises out of one of the myriad challenges to lender-placed insurance policies and the challenges to the fees and commissions earned by intermediaries involved in the procurement of this type of insurance. Lender-placed insurance is a type of property insurance placed on a home where the homeowner and mortgagor fails to purchase homeowners’ insurance even though it is required in the mortgage documents. Very often mortgages are not kept by the mortgage company, but are sold and often serviced by third-party mortgage servicers. The loan servicer has the responsibility to make sure there is hazard insurance on the property covering the amount of the loan. When the mortgagor fails to purchase homeowner’s insurance, the loan servicer will purchase the hazard insurance and bill the mortgagor.

This challenge was to the premiums that the loan servicer billed to the mortgagor. The plaintiffs claimed that there were services being provided by companies affiliated with the insurer for no charge in exchange for allowing the loan servicer to purchase the lender-placed insurance with that insurer on an exclusive basis. The plaintiffs claimed that these services were tantamount to an illegal kickback or rebate and therefore the premium charged was inflated and improper.

The insurer and its affiliate remained as the only defendants after the loan servicer settled out of the case. The insurer moved to dismiss the complaint base on the filed rate doctrine. The plaintiffs argued that the filed rate doctrine did not apply because the plaintiffs were not direct customers of the insurer.

As the Second Circuit explained, the filed rate doctrine precludes litigation challenging a rate approved by the regulator. First, any filed rate approved by the regulator is per se reasonable and unassailable in a judicial proceeding brought by ratepayers. Second, the courts should not undermine agency ratemaking authority and litigation should not become a means by which certain ratepayers obtain preferential rates. Here, even though the homeowners did not purchase the hazard insurance from the insurer, the hazard insurance was purchased on their behalf (as permitted by the contracts). Accordingly, the filed rate doctrine precluded the litigation because it interfered with both the principle of nonjusticiability of filed and approved rates and the nondiscrimination principle barring certain ratepayers from obtaining a discount.

Challenges to insurance rates are possible through the administrative review process allowed by nearly every state’s insurance and administrative laws. Direct litigation challenging filed and approved rates, however, is not permissible under the filed rate doctrine. While there have been regulatory activities addressing lender-placed insurance and the various agreements between mortgage servicers and insurance companies, the Second Circuit has made it clear that it is the insurance regulator that is charged with addressing these issues. The courts must not interfere with the ratemaking and regulatory process.