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.