As we previously explained in our May blog post, which covered the N.Y.S. Department of Financial Services Probe Into Force-Placed Insurance, in order to obtain a mortgage, lending banks usually require homeowners to maintain insurance on their property. If a homeowner fails to maintain his/her required insurance, pursuant to the terms of the mortgage agreement, the bank is entitled to forcibly place insurance on the property (i.e. purchase insurance for the home and then charge the homeowner/borrower the full cost of the premium).  Numerous lawsuits have been brought by homeowners against different banks alleging that the forced placed insurance practices are unfair because their lender: (i) purchased exorbitant insurance coverage that costs far greater than the homeowner’s previous coverage; (ii) received commissions or kick-backs from the insurer for the forced-placed coverage; (iii) billed homeowners for additional coverage that was not required under their mortgage agreement; and (iv) allowed the homeowner’s existing coverage to lapse without providing notice that it would purchase force-placed insurance.

Last month, U.S. District Judge Jan E. Dubois of the Eastern District of Pennsylvania denied in part defendants HSBC Mortgage Corporation and HSBC Mortgage Service, Inc.’s motion to dismiss a class action lawsuit involving force-placed insurance.  A copy of the decision can be found here.

In the HSBC litigation, a married couple living in Pennsylvania brought a class action lawsuit against the defendants alleging that the premiums on their force-placed insurance policies were unreasonably high and that defendants profited unlawfully by accepting kickbacks from insurers and purchasing unnecessary insurance policies. Plaintiffs asserted claims for breach of contract, unjust enrichment, and violations of Pennsylvania’s Unfair Trade Practices and Consumer Protection Law.

In her decision, Judge Dubois tossed plaintiffs’ unjust enrichment and unfair trade practices claims but determined that plaintiffs had alleged sufficient facts to state a claim for breach of the implied covenant of good faith and fair dealing.  The Court explained that:

“The purpose of a force-placement clause is to protect the lender’s interest in the property securing the mortgage loan. Plaintiffs allege a scheme whereby HSBC Mortgage used its power to force-place insurance on the property to gain additional profits at plaintiffs’ expense rather than using such power simply to protect its interest in the property. While section five of the mortgage contract did not require HSBC Mortgage to obtain the cheapest or most cost-effective insurance available, it was not entitled to use its discretion to obtain secret kickbacks on policies or charge plaintiffs for insurance covering periods of time that had passed without damage occurring to the property. Such behavior contravened plaintiffs’ reasonable expectations. For this reason, courts around the country have held in cases with almost identical facts that plaintiffs stated a claim for breach of the covenant of good faith and fair dealing. See, e.g., Kunzelmann v. Wells Fargo Bank, N.A., No. 9:11-cv-81373-DMM, 2012 WL 2003337 (S.D. Fla. June 4, 2012); McNeary-Calloway v. JP Morgan Chase Bank, N.A., No. C-11-03058 JCS, 2012 WL 1029502 (N.D. Cal. Mar. 26, 2012); Williams v. Wells Fargo Bank N.A., No. 11-21233, 2011 WL 4901346 (S.D. Fla. Oct. 14, 2011); Abels v. JPMorgan Chase Bank, N.A., 678 F. Supp. 2d 1273 (S.D. Fla. 2009).”

Abbey Spanier, LLP, located in New York City, is a well-recognized national class action and complex litigation law firm.  If your bank/lender has engaged in unfair business practices relating to force-placed insurance, please tell us your story.