Mortgage servicers and lenders have spent years fending off class-action lawsuits involving lender-placed insurance. A recent lawsuit introduced a novel twist to those cases: going after the force-placed insurer itself. Moving to dismiss, the insurer succeeded only in partially defeating the claims.
Nearly every mortgage requires the borrower to maintain adequate hazard insurance on the secured property. If the borrower fails to do that, the mortgage typically gives the lender authority to buy insurance on the borrower’s behalf, or to “force place” the insurance. It is also known as lender-placed insurance (LPI). Most LPI policies are expensive, often costing many times more than what a homeowner would pay on the open market.
In a recent decision, Iaffaldano v. Sun West Mortgage Company, a federal court in Florida grappled with allegations that an LPI insurer was liable to a class of borrowers, who claimed that the insurer got unlawful kickbacks from the lender that had purchased LPI from it. Specifically, the Real Estate Settlement Procedures Act (RESPA) imposes on mortgage servicers a number of requirements for acquiring LPI on behalf of a defaulted borrower. According to the plaintiffs in Iaffaldano, the kickbacks that the lender paid to the LPI insurer, Proctor Financial, Inc., violated RESPA. The borrowers also accused Proctor of improperly interfering with their business relationships with their lender, Sun West Mortgage.
In his written report and recommendation, the magistrate judge assigned to the case recommended that the RESPA claim be dismissed and that the tortious interference claim go forward. The magistrate judge found that, since the relevant RESPA provisions apply only to mortgage servicers, they cannot serve as a basis for a RESPA claim against an LPI insurer. The magistrate judge also recommended that the tortious-inference claim not be dismissed, because recent decisions in that court have allowed similar claims to proceed.
This ruling shows just how dogged plaintiff’s lawyers can be, trying different theories over the course of many years, constantly looking for the right combination of allegations that will survive a legal challenge. If they find that combination, the threat of classwide damages is often too much for businesses to handle. So they quickly settle.