Forced-Place Insurance Business Surged Following the Housing Collapse

JPMorgan Chase and Assurant Inc. recently agreed to settle a class-action lawsuit initiated in June 2012 for $300 million brought by a class of 1.3 million homeowners nationwide who claimed that they were overcharged for forced-placed insurance. The plaintiffs have also entered into a separate settlement for $4.75 million with Chase relating to forced-placed insurance for policies covering wind damage. The $300 million settlement relates to polices that cover fire and other risk.

The class-action lawsuit against JPMorgan Chase (as well as other similar actions against Wells Fargo Bank N.A., Bank of America N.A., Citibank N.A., and HSBC Bank Inc.) is pending in Miami before Chief Judge Federico A. Moreno of the United States District Court for the Southern District of Florida. Although Chase entered into the settlement agreement in September 2013, the final approval hearing before Judge Moreno is scheduled for February 14, 2014.

The practice of forced-placed insurance surged after the housing market collapsed, particularly in Florida, which according to court records had 31 percent of all forced-placed charges in the United States in 2011. The basis of the claim against Chase relates to provisions in its standard mortgage agreement requiring borrowers to maintain hazard and wind insurance on properties that secure their loans. The mortgage allowed for the placement of new coverage at the borrower’s expense if coverage should lapse or if properties were underinsured. The borrowers in this action alleged that Chase imposed policies for forced-place insurance that were far more expensive than market rates and received commissions from the insurance companies writing the policies.

Chase unsuccessfully sought to dismiss the lawsuit this past May, claiming that the contracts granted the lender substantial discretion in placing coverage and that the plaintiffs did not dispute that they breached their mortgage agreements by failing to maintain continuous coverage.

From the period of 2008 to the present, the homeowners alleged that Chase force-placed more than $2.3 billion in insurance coverage, netting Chase approximately $600 million. The settlement requires that Chase refund 12.5 percent of the annual premiums for forced-placed policies to all class-members, and that it refrain from inflating premiums for six years.

Domino Effect Expected

This class-action lawsuit against Chase and Assurant is not the first large-scale litigation over forced-placed insurance. Earlier this year in March, Wells Fargo and QBE Insurance Group Ltd. announced that they agreed to settle a similar claim, also pending in Miami before U.S. District Judge Robert Scola, for $19.3 million in favor of 30,000 borrowers. It is widely expected that Chase’s blockbuster settlement will set off a domino effect for plaintiffs to pursue similar deals against other banks at a time where forced-placed insurance actions are ripe for resolution. Defense attorneys in turn are expected to attempt to distinguish their client’s practices from Chase by arguing that they provided more disclosures.

“The precedent set by Chase Bank may encourage other lenders to follow by making significant payments to the similar class of borrowers,” Harry Low, an arbitrator, retired judge, and former California Insurance commissioner stated. Undoubtedly, the banks facing forced-placed insurance claims will have a strong interest in resolving these cases as soon as possible to avoid bad press and reduced stock prices.

Settlement Relevant to Repurchase Demands against Originators?

While clearly not directly related to claims being brought for repurchase, the Chase litigation and the other forced-placed litigations are yet another example of the questionable servicing practices on the part of the big banks that have been all too prevalent since the advent of the mortgage crisis. An originator might consider whether, and to what extent, alleged conduct of this sort on the part of servicers (that often are also the aggregators making the repurchase demands) caused or contributed to the alleged damage the aggregator is claiming against the originator.