Article Courtesy of The Palm Beach Post
By Charles Elmore
Published November 25, 2012
Advocates say lenders often get a cut of ‘excessive’ premiums banks choose to replace lapsed homeowners policies.
An insurance controversy affecting hundreds of thousands of people in Florida and other states never touched Laura Digan’s world — until a $23,287.54 bill rocked it.
The “force placed” homeowners insurance imposed by her mortgage company after a policy lapsed was more than four times as expensive as prior coverage. The single mother of two in Palm Beach County said she was shopping for an alternative to last-resort insurer Citizens when the charge hit.
“I was absolutely appalled, horrified, shocked,” Digan said.
She questioned and contested it for months. Mortgage servicer Capital One agreed to reduce the charges days after The Palm Beach Post inquired, Digan said.
But regulatory and legal battles are only beginning to come to a head for a once-obscure part of the insurance business that is attracting increasing scrutiny around the country. It has become a big moneymaker for the financial interests that benefit from it, producing $5.5 billion in premiums annually.
Homeowners can avoid force-placed premiums by being careful not to let insurance policies lapse, but consumer advocates blast what they see as unnecessary or even predatory practices against people struggling to climb out of the worst economic turmoil since the Great Depression. Many have wrestled with job loss or reduced income and the force-placed premiums themselves can tip people into foreclosure, advocates say.
Proposed federal rules to be finalized in January would provide new consumer protections when banks arrange the policies for borrowers.
The regulations would require banks to give borrowers at least 45 days’ notice of detailed costs and refund premiums when consumers provide timely proof of other coverage. Industry groups are pushing back against some proposals — including one that would make lenders use money in customers’ escrow accounts to maintain coverage, where possible, before resorting to force-placed insurance.
The escrow requirement has “no authority in law” and is “unworkable,” J. Kevin McKechnie, executive director of the American Bankers Insurance Association, told federal officials in October. It exceeds the scope of the Dodd-Frank law underlying the regulations that the federal Consumer Financial Protection Bureau is proposing, in his group’s view.
McKechnie expressed general support for notice requirements but said the escrow provisions place too great a burden on mortgage servicers to find out why a customer’s old policy expired and whether it can be renewed. That potentially places banks’ mortgage investments at risk, he said.
Public hearings have revealed why mortgage servicers may have a quiet incentive to choose the higher-priced policies: They often get a cut of the money. For example, New York state regulators this spring heard a representative for American Home Mortgage Servicing acknowledge a company affiliate receives 15 percent commissions from insurer QBE, according to published reports. Others have testified at hearings that banks can make money in other ways, such as fees for providing reinsurance for the insurance company.
A Florida regulatory hearing this year to lower the rates of force-placed carrier Praetorian Insurance “offers hope to consumers who have paid excessive rates for force-placed coverage throughout Florida,” a Consumer Federation of America official says.
CFA insurance director J. Robert Hunter argues a 44 percent rate cut is justified: “For every dollar Praetorian charged consumers between 2007 and 2011, it paid out only four and one-half cents in claims payments! The rest of the money went for either excessive profits for the insurer or kickbacks to banks and other lenders.”
Praetorian offered a 2 percent rate reduction in rates company officials called “comparable” to other carriers considering the uncertainty it faces. The state’s Office of Insurance Regulation proposed a 35 percent cut.
Praetorian withdrew its filing and is gathering information to resubmit, a spokeswoman for the state’s insurance office said.
As the year winds down, Florida regulators are expecting filings from other major force-placed insurers including American Security Insurance Co., spokeswoman Amy Bogner said.
Digan’s journey began after state-run Citizens denied her credits for hurricane shutters and wanted to raise the premium at her Boca Raton home, she said. She said she stayed in touch with Capital One as she looked for other options, but soon was confronted with a five-figure premium from Voyager Indemnity Insurance Co. of Atlanta.
Even after she resumed coverage with Citizens, Digan said bank officials maintained she owed more than $5,700 for about three months of force-placed coverage — more than the cost for an entire year of coverage with Citizens.
In a statement, Capital One said it could not get into the specifics of Digan’s situation because of customer privacy but a spokesman talked generally about why lenders use force-placed insurance.
“Borrowers are typically required by the terms of their loan agreements to keep their homes insured,” Capital One spokesman Patrick Mendoza said. “In Florida, rates are usually higher than other parts of the country due to the risk of hurricanes. Customers should shop around to find the best deal that works for them, taking into consideration rates and the availability of state subsidies, among other things.”
Mendoza continued, “As always, customers should stay in contact with their lender and be sure they open every piece of mail and correspondence, as well as work with their lender and insurance company to make sure that their coverage is current and up-to-date.”
Capital One is one of many mortgage servicers facing lawsuits over force-placed insurance. A suit filed in Washington state in September claims Capital One acted unlawfully by “purchasing unconscionably high priced insurance policies ” with “pre-arranged agreements to purchase force-placed insurance from a single company without seeking competitive bids in the open market to maximize their own profits.”
The suit filed by homeowner George Klika seeks class-action status and also accuses the mortgage servicer of giving and receiving “commissions or kickbacks for the procurement of the force-placed policies.”
Capital One denies getting a commission on forced-places policies but does not comment on pending litigation, Mendoza said.
Her bill came down after she fought back, but Digan said her concern now is for others facing what she did.
“I do think The Palm Beach Post escalated my issue and got me in front of someone who could make a decision,” Digan said.
But she’s one person. Many people in Florida and across the country have been hit with policies at five to 10 times the previous cost.
“There must be some type of protection for people from these outrageous situations,” Digan said.