South Florida Homeowners Seek Class Action Status In Lawsuit Tagging Loan Servicer Over Dubious, Force-Placed Insurance 'Gravy Train'

American Banker reports:

• The first time Luis Juarez heard of force-placed insurance was when he received a $25,000 bill for it in the mail. A Florida doctor and homeowner, Juarez had been dropped by his previous insurer over a roofing issue. Though that lapse violated his obligation under the mortgage to maintain coverage on the property, he was current on his loan payments and heard nothing from the servicer Wells Fargo & Co. for more than a year.
• Then on May 10, 2010, Juarez got a note from QBE Specialty Insurance, a partner of Wells. It said that QBE was retroactively charging him $25,000 for a policy that had expired two months earlier, according to court filings. Neither the price tag — nearly quadruple his original policy's rate, according to court papers — nor the expired status of the QBE policy were a mistake.
• The use of carriers like QBE adds another public wrinkle to the controversy over banks' imposition of homeowners coverage, because the carriers are unregulated in major states such as Florida. Wells Fargo, SunTrust Banks Inc. and others are buying what is called "surplus-line" insurance, which is neither governed by state premium caps nor guaranteed by state funds. That leaves the insurer free to charge whatever rates it pleases — and to share some of the proceeds with banks through payments to their affiliates.
• Force-placed insurance is already under fire from a coalition of state attorneys general because it burdens troubled borrowers with expensive premiums, provides inferior coverage and often dumps the cost on mortgage investors at the time of foreclosure if borrowers failed to pay the premiums. In the process, banks reap lucrative commissions from insurers.

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• QBE is "more aggressive in placement, and their pricing is worse," said Jeffrey Golant, a Florida attorney who recently filed a lawsuit on behalf of Juarez and others alleging that Wells Fargo and QBE engaged in self-dealing and charged unreasonable premiums. "There is no regulation of their rates at all, and they appear to believe that being surplus lines allows them to do anything they want."
• According to the lawsuit, which seeks class-action status, the premiums were nearly four times those for the policy Juarez had bought through a state-run company that normally charges Florida's maximum legal rate. Wells Fargo said that the Juarez case was "unique" in that the lapse in voluntary coverage was not detected for well over a year.

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• Force-placed insurance is lucrative for mortgage servicers. An American Banker story published in November found that banks often collect sizable force-placed commissions from insurers — even when servicers do not perform significant work in the production of the policy.(1) Mortgage bond analysts and borrower advocates have flagged this relationship as a potential conflict of interest.

For more, see New Questions about Banks' Force-Placed Insurance Deals (QBE, carrier used by Wells Fargo and SunTrust, avoids oversight through 'surplus lines' structure).

For the lawsuit, see Williams, et al. v. Wells Fargo Financial Inc., et al.

(1) See Ties to Insurers Could Land Mortgage Servicers in More Trouble (Force-placed policies impose costs on both homeowner, investor):

• "There's no arm's-length transaction here, and that creates all sorts of incentives for the servicer to force-place excessive insurance and overcharge consumers for policies that provide minimal benefit," said Diane Thompson, of counsel for the National Consumer Law Center. "Servicers and insurers have turned this into a gravy train." [...] State court filings show alleged abuse in which banks charged borrowers for unnecessary insurance and backdated policies providing coverage retroactively.