Force-Placed Insurance Lawsuit Settled for $300 Million

New York, NYJPMorgan Chase & Co and Assurant have settled a lawsuit alleging the companies were involved in unethical dealings related to force-placed insurance. The force-placed insurance lawsuit alleged the companies forced borrowers into price-inflated property insurance and that the companies were involved in kickbacks that increased the price of the policies.

Reuters (9/9/13) reports that the lawsuit, worth $300 million, also calls on JPMorgan to stop accepting fees for force-placing insurance.

Force-placed insurance, also called creditor-placed or lender-placed insurance, is put on a property if the homeowner cannot provide proof of insurance of the property, such as if the insurance policy has lapsed. It is done to protect the bank or mortgage lender’s interest in the property, but is often much more expensive than commercially available insurance and comes with less protection. Lawsuits against banks and insurers allege that fees, commissions and reinsurance arrangements have further increased the price of force-placed insurance.

According to the JPMorgan lawsuit, there are two insurance companies that control the market for force-placed policies, and the companies along with their affiliates enter exclusive relationships with mortgage lenders and servicers. “To maintain their exclusive relationships with these lenders, the insurers pay them unearned ‘kickbacks’ of a percentage of the force-placed premiums ultimately charged to the borrower, offer them subsidized administrative services, and/or enter into lucrative captive reinsurance deals with them,” the lawsuit alleged. Borrowers often wind up paying for backdated insurance to cover times when no claims were made, or paying for coverage that goes beyond legal requirements.

Furthermore, the lawsuit alleged, lenders often force-place insurance that provides coverage in excess of the lender’s risk. These practices result in premiums “up to ten times greater than those available to the consumer in the open market.” Part of the reason for the inflated cost of the premiums, according to the lawsuit, is that undisclosed kickbacks to the defendants are included in the premiums.

Affected by the settlement are members of the class who were insured under a hazard LPI policy placed through Chase between January 1, 2008, and the preliminary approval date.

Meanwhile, New York regulators have proposed changes to legislation governing force-placed insurance. According to Insurance Journal (9/19/13), regulators say the changes would eliminate kickbacks and lower force-placed insurance rates. Among the changes are prohibiting insurers from issuing a policy on a property serviced by a lender affiliated with the insurer and not making payments to lenders in exchange for their securing policies.

According to information from the New York Department of Financial Services (dfs.ny.gov), force-placed insurance premiums are between two and 10 times higher than premiums for voluntary insurance. “Insurers and banks have built a network of relationships and financial arrangements that have driven premium rates to inappropriately high levels,” the department notes.

The JPMorgan lawsuit is Salvatore Saccoccio v JP Morgan Chase Bank N.A. et al, No. 13-cv-21107, US District Court, Southern District of Florida.