Seventh Circuit Dismisses Allegations of Fraudulent Force-Placed Insurance

The Seventh Circuit Court of Appeals recently dismissed a borrower’s putative class action lawsuit under the Illinois Consumer Fraud and Deceptive Business Practices Act, alleging that a lender and insurer fraudulently insured the borrower’s property after the borrower’s homeowner’s policy expired. In Cohen v. American Security Insurance Co., 735 F.3d 601 (7th Cir. 2013), the homeowner held a secured loan with Wachovia Mortgage, FSB, which required her to maintain homeowner’s insurance on the residence as a condition of her loan agreement. When the homeowner’s policy lapsed, Wachovia purchased replacement coverage at a rate more than twice as expensive as she had previously paid. Id. at 603. Wachovia charged the homeowner for the cost of the replacement coverage. Id. The coverage procured by Wachovia also included a commission to Wachovia’s insurance agent affiliate, a feature allowed under the loan agreement. Id.

The homeowner sued Wachovia and the insurance company on behalf of a purported class of similarly situated individuals, alleging several statutory and common law counts, including that the actions of the lender and insurance company were unfair or deceptive under the Illinois Consumer Fraud and Deceptive Businesses Act because Wachovia did not disclose that it was receiving what she termed a “kickback” from the procurement of the new coverage. Id. The Court rejected the consumer’s claim, holding that “the loan agreement and Wachovia’s disclosures, notices, and correspondence conclusively defeat any claim of fraud, false promise, concealment, or misrepresentation,” as “the notice that [the homeowner] signed in conjunction with her home-loan transaction clearly described the consequences of her failure to maintain hazard insurance on the property as required under the loan agreement.” Id. at 609. The Court additionally rejected the claim that the homeowner had been coerced into receiving the lender-purchased insurance, as she had the option at any time, even after the lender had procured coverage in place of her lapsed coverage, to reinsure the property herself retroactively and “and receive a pro rata refund of the lender-placed insurance premium.” Id. at 612. The Court also rejected the homeowner’s breach of contract claims, noting that nothing in the loan agreement prohibited the lender and its affiliates from receiving a commission if it was forced to purchase lender placed insurance.

The Seventh Circuit decision is an important one for banks and other lenders, as it enhances the ability of lenders to protect their investments in secured properties in the event that borrower coverage lapses. Fitch Law Partners LLP will continue to monitor developments in this area in the First Circuit Court of Appeals and throughout the country.

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