SAN FRANCISCO (CN) – Former customers of JPMorgan Chase can pursue a class action challenging overpriced, “force-placed” hazard insurance policies that the banking giant forced on certain borrowers, a federal judge ruled.
The ability to force-place hazard insurance is a typical clause in most mortgage loan contracts, as it is considered a method of protecting the lender’s interest in the secured property.
However, the plaintiffs charge that Chase purchases force-placed insurance (FPI) “from insurers that provide a financial benefit to defendants and/or their affiliates and at rates that far exceed borrower-purchased hazard insurance (while providing substantially less coverage).”
Lead plaintiffs Patricia McNearny-Calloway, Colin MacKinnon, Terrie MacKinnon, Andrea North and Sheila Mayko also allege that Chase backdates the FPI policies to collect premiums for periods that have already passed and duplicates coverage by purchasing FPI policies immediately following the termination of the homeowners’ coverage, even though the bank is temporarily protected under Lender’s Loss Payable Endorsement language under homeowner policies.
McNearny-Calloway claims that after her husband died and financial difficulties forced her to stop paying the $1,640 annual premium for hazard insurance in August 2009, JPMorgan Chase purchased a policy in January 2010, backdated to August, with an annual premium of $4,233 and charged the policy to her escrow account. Chase’s policy provided less coverage than her own policy, according to the plaintiff.
The bank then automatically renewed McNearny-Calloway’s policy at the same rate on August 26, 2010. She purchased her own policy, for $1,103 on September 1. Chase cancelled its FPI policy, “but charged her escrow account for retroactive coverage for the period extending from August 26, 2010 to September 1, 2010,” according to the complaint.
After plaintiff Andrea North’s $1,084 policy was cancelled for non-payment after she became seriously ill in 2009, Chase purchased a backdated policy for $5,377 in December 2009 and then renewed the policy at the same rate six months later. North obtained her own insurance coverage after that renewal notice for $1,134, and claims that the bank has never refunded the charges for the FPI policy.
All plaintiffs state that there were no damages or losses at any of their properties from the time their own policies lapsed and Chase procured backdated policies for them, according to US Magistrate Judge Joseph Spero’s ruling.
In the class action, the plaintiffs claim that JPMorgan Chase violated RESPA’s prohibition on accepting kickbacks, breached contracts with the plaintiffs, engaged in unlawful business practices under California law and violated New Jersey’s Consumer Fraud Act. Plaintiff Mayko is a New Jersey resident.
Spero dismissed the plaintiffs’ RESPA claim, ruling that they failed to state a claim. “Because RESPA covers only the provision of services ‘in connection with’ the closing of a loan, the court cannot conclude that providing hazard insurance years after settlement qualifies as a settlement service,” Spero said.
The plaintiffs do succeed in stating their breach of contract and breach of implied covenant claims, the magistrate said.
“Broad discretion is not unlimited discretion. Nothing in the contract necessarily authorizes charges regardless of amount and regardless of whether defendants receive a portion of the premiums. Nor does anything in the contract authorize backdating FPI policies to cover periods of time where no loss occurred. Because the court cannot say that the contracts’ terms unambiguously authorize defendants’ alleged behavior, the court denies defendants’ motion to dismiss the California plaintiffs’ breach of contract claim,” Spero wrote.
New Jersey plaintiff Mayko, though her contract contains slightly different wording than the California plaintiffs, may proceed with her breach claims on the same grounds, Spero said.
While the plaintiffs fail to state unlawful business practices under the unlawful and fraudulent prongs of the statute, Spero ruled that the unfair prong could not be ruled out at this stage.
“Plaintiffs allege that Defendants unfairly force-placed exorbitantly priced hazard insurance on their property and backdated the policy despite no damage to the property or claims arising out of the property during the backdated period. This practice was disadvantageous to Plaintiffs and unsupported by any apparent reason other than the fact that Defendants stood to benefit financially from the high-priced, backdated policy. Moreover, Defendants’ arrangement with ASIC resulted in financial gains to Defendants, at Plaintiffs’ expense, and created incentives for Defendants to seek policies with the highest premiums. The Court cannot say that this allegation fails as a matter of law,” he wrote.
Mayko’s claim under New Jersey’s Consumer Fraud Act (CFA) can also move forward, Spero said.
“The allegations of the scheme, and its profitability for Defendants, is sufficient to plead an intent by Defendants to conceal its FPI practice. The Court concludes that these allegations are sufficient to meet the pleading requirements of Rule 9(b) and adequately plead an “unlawful practice” under the CFA,” he wrote.
The plaintiffs also stated valid claims for restitution in the complaint, but claims for injunctive and declaratory relief will have to satisfy the legal standard later in the proceedings, Spero said.The plaintiffs have 30 days to file an amended complaint to address the RESPA inadequacies, the magistrate said.