Filed Rate Doctrine and Lender Placed Insurance

Posted on March 25, 2021 by Barry Zalma

Homeowner Owes to Pay Lender Placed Insurance Premium to Mortgagee

Robert Lewis (“Lewis”) sued his mortgage loan servicer, M&T Bank (“M&T”), in connection with flood insurance coverage purchased by M&T on his behalf. Lewis also sued three subsidiaries of the insurance company Assurant, Inc. (collectively, the “Assurant”). Lewis alleges that, in “force-placing” flood insurance on his mortgaged property, M&T and Assurant violated the Racketeer Influenced and Corrupt Organizations Act (“RICO”). In Robert R. Lewis v. M&T Bank Corp., Et Al., Civil Case No. 3:20-CV-00552 (JCH), United States District Court District Of Connecticut (March 19, 2021) the USDC dealt with the defendants motions to dismiss the Complaint.

BACKGROUND

In July 2010, Lewis took out a mortgage on his property in Branford, Connecticut. To protect the lender’s interest, the loan agreement signed by Lewis requires him to maintain hazard insurance on the property for the life of the loan. Should Lewis fail to maintain adequate hazard insurance, the loan agreement permits the lender to purchase such coverage on his behalf, known as lender-placed insurance (“LPI”), and then seek reimbursement from him.

The flood insurance policy Lewis had obtained expired in June 2017. That same month, ASIC—with whom M&T had contracted to monitor its loan portfolio, sent Lewis a notice on M&T’s behalf informing him that his flood insurance had lapsed and that, if he did not provide proof of coverage, M&T intended to purchase LPI for his property. The notice stated that the insurance purchased by M&T might “be significantly more expensive than the insurance [Lewis could] buy [him]self” and concluded that “obtaining [his] own insurance was in [Lewis’s] best interest.”

When Lewis failed to obtain or provide proof of coverage, M&T purchased LPI from ASIC. That insurance was purchased at rates approved by, and on file with, the Connecticut Insurance Department (“CID”). M&T, in turn, sought reimbursement from Lewis in that amount.

Lewis alleged that the amount M&T billed him for LPI was inflated because those charges did not reflect hidden rebates received by M&T on its LPI purchase from ASIC. Specifically, Lewis alleged that M&T agreed to buy LPI exclusively from Assurant. In exchange for this exclusive right, Assurant agreed to take over from M&T certain mortgage servicing functions—e.g., monitoring M&T’s loan portfolio for lapses in coverage, sending notice letters like those received by Lewis, and customer service—either at a discount or for free, thereby reducing M&T’s operational expenses. In addition, Assurant pays M&T “unearned commissions,” unmerited “expense reimbursements,” and “illusory reinsurance premiums” in exchange for the exclusive right to be M&T’s LPI provider.

LEGAL STANDARD

When deciding a motion to dismiss the court must determine whether the plaintiff has stated a legally cognizable claim by making allegations that, if true, would plausibly show that the plaintiff is entitled to relief. The court takes all factual allegations in a complaint as true and draws all reasonable inferences in the plaintiff’s favor.

A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged. Dismissal is appropriate when it is clear from the face of the complaint, and matters of which the court may take judicial notice, that the plaintiff’s claims are barred as a matter of law.

ANALYSIS

In a case before the Second Circuit plaintiffs’ claims were barred by the filed rate doctrine which avers that under the filed rate doctrine, any filed rate—that is, one approved by the governing regulatory agency—is per se reasonable and unassailable in judicial proceedings brought by ratepayers. Two principles underpin the doctrine: First, the principle of “nonjusticiability” holds that the courts should not undermine agency rate-making authority by upsetting approved rates; and second, the principle of “nondiscrimination” holds that litigation should not become a means for certain ratepayers to obtain preferential rates. A claim that implicates either principle is barred.

The theory behind the claims is that Plaintiffs were overbilled when they were charged the full LPI rates (which were approved by regulators), instead of lower rates net of the value of loan tracking services provided by the insurance company affiliate. That theory can succeed only if the arrangement with the affiliate should have been treated as part and parcel of the LPI transaction and reflected in the LPI rates. But, under the nonjusticiability principle, it is squarely for the regulators to say what should or should not be included in a filed rate.

As an initial matter, the state of Connecticut has conferred power on the CID to determine the reasonableness of the rates at issue here. An insurer must file its premium rates for personal and commercial risk insurance with the CID Commissioner and obtain approval before charging those rates. ASIC had applicable rates on file with CID in 2017, 2018, and 2019, when it issued the respective flood LPI policies that were purchased by M&T on Lewis’s behalf.

CID did in fact approve the premium rates charged by ASIC for the flood LPI purchased by M&T in 2017, 2018, and 2019. It follows that this case implicates the nonjusticiability strand of the filed rate doctrine. M&T sought from Lewis reimbursement in precisely the amount it paid ASIC for LPI. Lewis complains that the amount billed to him by M&T was inflated because the charges did not reflect the alleged kickbacks received by M&T from ASIC. However, because the amount billed to Lewis is equal to the premium rates approved by the CID, Lewis’s claims necessarily rest on the premise that the rates approved by regulators were too high.

Because Lewis’s suit would require this court to examine LPI premium rates filed with and approved by the CID, the filed rate doctrine bars his claims. The case law is clear on the effect of the filed rate doctrine when there is a filed rate in effect. He thus has not plausibly alleged facts that would entitle him to relief. For the foregoing reasons, Assurant’s and M&T Bank’s respective Motions to Dismiss were granted.

ZALMA OPINION

Insurers admitted to do business in a state, like Connecticut, must submit their rates to the Department of Insurance for approval. Once approved no court – due to the filed rate doctrine – has the right or ability to contest the rates charged. Lewis sought to have free flood insurance and in so doing breached the terms of his mortgage and tried – by litigation – to have a court sustain his breach as proper. His attempt failed since the bank only sought to recover the premium paid. They warned him twice and twice he ignored the warning.

? 2021 – Barry Zalma

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost

equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 52 years in the insurance business. He is available at https://www.zalma.com and [email protected].

Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

Over the last 53 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

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