The first time Luis Juarez heard of force-placed insurance was when he received a $25,000 bill for it in the mail.
A Florida doctor and homeowner, Juarez had been dropped by his previous insurer over a roofing issue. Though that lapse violated his obligation under the mortgage to maintain coverage on the property, he was current on his loan payments and heard nothing from the servicer Wells Fargo & Co. for more than a year.
Then on May 10, 2010, Juarez got a note from QBE Specialty Insurance, a partner of Wells. It said that QBE was retroactively charging him $25,000 for a policy that had expired two months earlier, according to court filings.
Neither the price tag — nearly quadruple his original policy's rate, according to court papers — nor the expired status of the QBE policy were a mistake.
The use of carriers like QBE adds another public wrinkle to the controversy over banks' imposition of homeowners coverage, because the carriers are unregulated in major states such as Florida. Wells Fargo, SunTrust Banks Inc. and others are buying what is called "surplus-line" insurance, which is neither governed by state premium caps nor guaranteed by state funds. That leaves the insurer free to charge whatever rates it pleases — and to share some of the proceeds with banks through payments to their affiliates.
Force-placed insurance is already under fire from a coalition of state attorneys general because it burdens troubled borrowers with expensive premiums, provides inferior coverage and often dumps the cost on mortgage investors at the time of foreclosure if borrowers failed to pay the premiums. In the process, banks reap lucrative commissions from insurers.
Though there is no evidence that the banks sought surplus-line coverage because of its potential to carry higher prices, borrower advocates say that the companies' use of unregulated carriers exposes homeowners and mortgage investors to higher costs and greater risk in the event of a catastrophe. Moreover, some question whether banks' agents are making the mandatory effort to seek coverage from regulated insurers first.
QBE is "more aggressive in placement, and their pricing is worse," said Jeffrey Golant, a Florida attorney who recently filed a lawsuit on behalf of Juarez and others alleging that Wells Fargo and QBE engaged in self-dealing and charged unreasonable premiums. "There is no regulation of their rates at all, and they appear to believe that being surplus lines allows them to do anything they want."
According to the lawsuit, which seeks class-action status, the premiums were nearly four times those for the policy Juarez had bought through a state-run company that normally charges Florida's maximum legal rate. Wells Fargo said that the Juarez case was "unique" in that the lapse in voluntary coverage was not detected for well over a year.
"Wells Fargo wants to assure that our customers have continuous hazard insurance coverage," a spokeswoman said. "In rare instances, when there is a failure of notification from a prior carrier, it can take some time to recognize the lack of coverage."
Representatives of QBE declined to answer questions about why it has chosen to sell force-placed insurance as a surplus-line provider, and refused to say in which states it operates on a surplus-line basis. Wells and SunTrust defend the propriety of their practices.
Force-placed insurance is lucrative for mortgage servicers. An American Banker story published in November found that banks often collect sizable force-placed commissions from insurers — even when servicers do not perform significant work in the production of the policy. Mortgage bond analysts and borrower advocates have flagged this relationship as a potential conflict of interest.
Out of concern that banks were unfairly profiting from struggling homeowners, state attorneys general are now seeking to restrict the practice. The terms of a proposed mortgage servicing settlement would prohibit servicers from accepting "commissions," "referral fees," or "kickbacks" in relation to the policies, and prevent banks from force-placing policies when voluntary coverage could simply be extended.
Those terms would drastically alter an industry that until recently received little attention from regulators or the public.
"Generally, we have concerns about consumers being compelled to pay substantially overpriced insurance premiums, particularly in cases where consumers are already under financial stress," a spokesman for Iowa State Attorney General Tom Miller wrote in an email to American Banker in March.
"People in default are an easy mark," said Margery Golant, Jeffrey Golant's mother and an attorney who was among the first to draw attention to the widespread use of force-placed insurance in the wake of the housing collapse. "Practically every single person who is in default has one of these, and most of the time [borrowers] don't even tell us about it unless we ask. And I have seen instances where borrowers who were performing were pushed into default by force-placement."
Though QBE maintains regulated and unregulated arms in many jurisdictions, it appears to sell force-placed insurance solely as a surplus-line product in Florida, Texas and perhaps other states.