If you take out a mortgage to purchase a home, your lender generally requires you insure the property to protect against possible damage. A homeowners policy often satisfies the lender's requirements. But if you do not have a homeowners policy—or you allow your existing policy to lapse—the lender can actually purchase insurance on your behalf. This is known as “forced-placed” or “lender-placed” insurance.
Lender-placed insurance is usually more expensive than a homeowners policy and affords the homeowner less coverage. This is because a lender-placed policy only insures against damage to the property itself and not to the homeowner's personal items, such as furniture and clothing. A lender-placed policy also does not insure the homeowner against liability arising from injury to third parties which may occur on the property.
Legal Controversy Over LPI Rates
The high cost of lender-placed insurance (LPI) has attracted attention from officials in New York and other states in recent years. New York’s Department of Financial Services noted some LPI providers charged homeowners as much as ten times as voluntarily purchased policies. In 2013, Gov. Andrew M. Cuomo announced settlements with a number of LPI providers, ordering them to pay millions of dollars in fines and refunds to homeowners.
But not all homeowner efforts to obtain LPI refunds have been successful. Recently a federal appeals court killed a class action brought by a number of homeowners in New York, New Hampshire and Texas against two companies responsible for their LPI policies. The plaintiffs all had mortgages serviced by GMAC Mortgage LLC. GMAC purchased LPI policies for each plaintiff through a company called Balboa. Balboa also provided loan-tracking services through another affiliate.
The plaintiffs argued the loan-tracking services were actually an illegal kickback to GMAC. LPI policies are subject to rate schedules approved by state insurance regulators. This is the rate homeowners paid. But since GMAC received an additional benefit from Balboa's loan-tracking services, the plaintiffs argued this was effectively a discount.
The plaintiffs settled with GMAC after the latter filed for bankruptcy. But Balboa continued to oppose the class action, arguing it had done nothing wrong. In a July 22 opinion, the U.S. Second Circuit Court of Appeals in New York agreed. Judge Dennis Jacobs, writing for a three-judge panel, said Balboa was immune from suit under what is known as the “filed rate doctrine”. This doctrine holds when an insurance rate is approved by state regulators—as Balboa's was in this case—such rates cannot be subsequently challenged in court. As Judge Jacobs explained, “The doctrine is grounded on two rationales: first, that courts should not 'undermine agency rate-making authority' by upsetting approved rates...and, second, that litigation should not become a means for certain ratepayers to obtain preferential rates.”
Have a Question About Property Insurance?
Insurance is just one legal issue that arises during a real estate transaction. Whether you are the buyer or the lender, it is important you understand your rights and responsibilities under New York law. If you need advice from an experienced New York real estate attorney, contact our offices today.