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Forced Placed Insurance Litigation Heats Up

A host of lawsuits and class actions accuse some of the nation’s biggest mortgage servicers of needlessly obtaining overpriced forced-placed insurance policies and backdating the coverage in order to maximize kickbacks for insurance premiums.

U.S. District Judge Michael Simon denied a motion to dismiss by Bank of America and ruled on July 11 that the plaintiffs’ breach of contract claims in Arnett v. Bank of America can proceed in a nationwide class action, according to a news release from the plaintiffs’ law firm Taus, Cebulash & Landau LLP. The complaint alleges BofA improperly force-placed high-premium flood insurance policies on borrowers by informing borrowers of one set of flood insurance requirements at closing then subsequently demanded unwarranted additional coverage.

The statement noted that a similar case filed on behalf of BofA borrowers with home-equity lines of credit is pending before the same judge.

Michelle Spell filed a lawsuit in the Circuit Court of Montgomery County, Alabama, against BAC Home Loan Servicing LP, Fidelity National Property and Casualty Insurance Co., Lexington Insurance Co. and Southwest Business Corp. alleging various state-law torts relating to the forced placement of excessive flood insurance policies on her home. The defendants remanded the case to federal court. But Spell argued that her claims do not arise under federal law, and the federal court agreed and remanded the case back to state court on May 11.

Pamela and Mark Lemmer filed a class action lawsuit against Bank of America, N.A., in a North Carolina federal court alleging that the bank falsely represented that flood insurance was required for their cooperative unit by their mortgage and federal law even though their mortgage agreement does not contain a flood insurance requirement and federal law does not require flood insurance for cooperative units, Nichols Kaster PLLP announced in April. BofA allegedly collected a commission for the policy. The complaint asserts claims against BofA for breach of contract, breach of the covenant of good faith and fair dealing and fraud.

On July 11, HSBC Mortgage Corp. filed a motion to dismiss a March 7 putative class action filed in federal court in Manhattan by Christopher Maxwell. The plaintiff, who took out the loan on his Georgia property in November 2001, alleges that HSBC procured “exorbitantly priced” policies from co-defendants Assurant Inc. and California-based subsidiary Tracksure Insurance Agency Inc. HSBC claims that lead plaintiff Maxwell never paid the premiums and lacks standing.

A putative class action was filed against GMAC Mortgage LLC and Balboa Insurance Co. in a Manhattan federal court, Kirby McInerney LLP announced in April. The class includes borrowers who were charged forced-placed insurance premiums since March 6, 2003, on loans serviced by the GMAC.

GMAC allegedly collected fees from Balboa on forced-placed insurance policies then reimbursed itself for servicing advances for the premiums including the kickbacks — which were allegedly disguised as commissions. The alleged scheme was operated at the expense of investors — including Fannie Mae and Freddie Mac. Claims are being made under the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. Section 1961, et seq., and state law.

Kirby McInerney separately announced that it is investigating American Home Mortgage Servicing Inc., which now operates as Homeward Residential, and Wells Fargo Home Mortgage for similar schemes involving improperly inflating the cost of force-placed hazard insurance.

A federal judge ruled that Patricia McNearny-Calloway, Colin MacKinnon, Terrie MacKinnon, Andrea North and Sheila Mayko — lead plaintiffs in a class action against JPMorgan Chase — can pursue their class action challenging overpriced, force-placed hazard insurance policies, Courthouse News Service reported. US Magistrate Judge Joseph Spero reportedly wrote that the defendant unfairly force-placed exorbitantly priced hazard insurance on their property and backdated the policy solely to boost its own commissions from the premiums.

Fannie Mae had issued new guidelines in March on the use of forced-placed insurance. But in May, a servicing notice indicated that the implementation was being postponed, and an updated announcement with a new effective date would subsequently be issued providing additional guidance on lender-placed property insurance requirements.

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