The most common class-action battle in the real estate industry today deals with so-called force-placed insurance, which mortgage lenders buy when a borrower wrongly lets her homeowner’s coverage lapse. Courts around the country have come to varying conclusions about the viability of those cases. Two recent decisions add to the tally of opinions favoring consumers.
The typical mortgage requires the borrower to maintain hazard insurance on the collateralized property, and it also allows the lender to buy (or “force place”) protection if the homeowner fails to do that. The rates for lender-placed insurance often exceed what a borrower could get on the open market. For example, in Sekula v. Residential Credit Solutions, the plaintiffs bought coverage for their home for $785, while the amount their lender charged for a forced-place policy was $10,544. Borrowers allege that force-placed premiums are inflated by unlawful kickbacks from the insurer to the lender.
As the court in Burroughs v. PHH Mortgage Corporation recognized, these class actions are “proliferating throughout the nation’s courts.” Their success, that court noted, “depend[s], in part, on the jurisdiction in which they are filed.” The areas in which plaintiffs have enjoyed the most success are Florida, Pennsylvania, and New Jersey. By contrast, New York courts have gone the other way.
The most hotly-contested issue in these cases is whether the claims are barred by the filed-rate doctrine. That doctrine holds that, if an insurance rate has been approved by state regulators, then consumers cannot challenge that rate through court action. Courts disagree about whether force-placed lawsuits attack approved rates themselves, which would trigger the filed-rate doctrine, or the conduct underlying the formation of those rates, which would supposedly not trigger the doctrine.
Federal appellate courts in Pennsylvania and New York have reached opposite conclusions about that issue. In the Burroughs case, PHH Mortgage Corporation appears to be positioning itself to present that question to the United States Supreme Court as part of a circuit split. With the ideological balance of the high court currently in flux, that could be a risky strategy.
In any event, these recent consumer successes are even more surprising considering the extent to which the mortgage industry has gone to incorporate force-placed practices into mortgage notes. For example, in Sekula, the borrower explicitly agreed that premiums for lender-placed insurance “might significantly exceed the cost of insurance that Borrower could have obtained.” But even that did not deter the court from allowing the case to proceed.