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Lawsuit Over Denied M.I. Claims

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Mortgage Daily

                                                 November 9, 2007

A bankrupt mortgage servicer has filed a lawsuit against a mortgage insurer because of rejected claims. But the insurance company claims mortgage fraud on the loans in question relieves it of liability.

American Home Mortgage is suing Triad Guaranty Insurance Co., alleging losses of more than $1 million because the company “unjustifiably refuses to honor valid claims” related to 14 defaulted mortgage loans.

Claiming breach of its insurance contract, American Home is seeking a declaratory judgment relating to that insurance agreement, the awarding of costs and attorney fees, and other relief in its complaint, which was filed on Nov. 5 in U.S. Bankruptcy Court in Wilmington, Del.

“Triad is obligated to pay American Home’s insurance claims for the defaulted loans,” the suit maintains.

The mortgage insurance company did not immediately respond to requests for comment from MortgageDaily.com.

American Home filed for relief under Chapter 11 of the U.S. Bankruptcy Code in the Delaware court on Aug. 6.

During September, Winston-Salem, N.C.-based Triad had canceled coverage on the 14 loans, all originated by American Home in 2005 and 2006, after “it allegedly uncovered irregularities that existed at the time American Home originated the defaulted loans,” according to American Home’s complaint.

Those alleged irregularities, according to the complaint, include a purportedly negligent analysis by property appraisers, misrepresentations by the borrower of their income and/or existing mortgage debts and incomplete loan applications.

The complaint admits that American Home’s private mortgage insurance policy with Triad “excluded coverage if, during origination, American Home inadvertently relied on misrepresentations of borrowers or appraisers.”

Whether those alleged irregularities exist and, if so, whether they are sufficient to exclude all or some of the 14 loans from insurance coverage under the policy appears to be the issue in the complaint.

However, specific allegations and other details, including some provisions of the insurance agreement, and also one of the actions American Home is seeking from the court have been redacted or sealed for confidentiality reasons.

American Home, in its complaint, notes that while it may recover a portion of its losses on the 14 loans through foreclosures and sales, “these sales will not, however, in the aggregate fully compensate American Home for the losses occasioned by Triad’s refusal to cover American Home’s claims.”

“In the aggregate,” American Home alleges, “Triad’s refusal to honor claims relating to the defaulted loans caused American Home to suffer a combined net loss of not less than $1,132,105.51.”

Triad has until Dec. 6 to file a motion or answer to American Home’s complaint.

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