by:Richard E. Shevitz , Attorney
Banks and insurance companies have come under fire for conspiring to overcharge homeowners for insurance when their policies lapse. Home mortgages include standard clauses which allow banks to “force place” insurance on a borrower’s home if the home is not properly insured. Some banks and insurance companies have conspired to take advantage of this process by placing insurance on these homes and charging the homeowners premiums at rates that vastly exceed regular market rates, with the banks sharing in those rates through various kickbacks. The above-market premiums are paid by the homeowners. Of course, if a homeowner cannot afford the exorbitant premiums for force-placed insurance, the premiums are added to the mortgage’s principal balance.

The banks and insurance companies are able to take advantage of the homeowners because force placed insurance policies are not purchased on the open market in a competitive environment. There are no market forces at work to keep the prices down. moneyfunnel.jpgThe premiums on force-placed insurance policies reportedly can cost up to ten times more than what the borrower was either originally paying or what the borrower could obtain if done so on a competitive basis on the open market, and produce high profit margins. One insurance company generated $2.7 billion in premiums in single year through its force-placed insurance policies.
The lucrative deals between the banks and the insurance companies result in “reverse competition,” in which insurance companies compete for the lender’s force-placed business by offering financial considerations to the banks in various forms. Those expenses are then included in the premiums charged to homeowners, which drives up the price of the force-placed policies even further. In addition, there are no insurance agents or brokers involved to justify any commissions or to search for cheaper coverage. Normally, agents typically spend a lot of time and money securing and retaining clients for voluntary home insurance coverage. But with force placed insurance, commissions are charged to the homeowner even though no agent is working for them to shop for the insurance. Instead, the insurance company gets access to the banks’ mortgage records, identifies homes that are suitable for force-placed insurance, and then force places whatever coverage they choose – often in amounts that exceed the value of the property — and charge excessive premiums, the costs of which ultimately are passed back on to the homeowners. The premiums can include the amounts the insurance company charges for reviewing the banks’ records to identify borrowers’ whose houses can be the subject of force-placed insurance by the insurance company and the bank.
In recent testimony before the New York State Department of Financial Services, the President of American Security Insurance Company admitted that the price of premiums for force place insurance include not only commissions but also the expenses of monitoring the process of placing that coverage.
Cohen & Malad, LLP has filed a class action lawsuit in Georgia against Wells Fargo and two insurance companies — American Security Insurance Company and Assurant, Inc. – seeking to recover damages on behalf of homeowners in that state who were overcharged for force placed insurance as a result of misconduct by these institutions.