A federal judge has granted class action status to plaintiffs in a much-watched force-placed insurance case against Wells Fargo & Co. and QBE Insurance Inc., opening the door to high-stakes litigation over alleged industry kickbacks.
The Tuesday ruling in Williams v. Wells Fargo et al by Judge Robert Scola, Jr. of U.S. District Court for the Southern District of Florida reinforces banks' vulnerability to legal attacks over their purchase of so-called forced-placed insurance on behalf of borrowers whose homeowner policies have lapsed.
Force-placed hazard insurance is designed to protect creditors in the event that an uninsured borrower's property is damaged. Mortgage contracts typically entitle banks to purchase such policies on behalf of homeowners who fail to maintain hazard coverage themselves and to pass on to them the cost of the coverage.
The Florida suit does not take issue with the cost of such policies directly but instead accuses Wells and QBE of inflating the cost of such coverage by secretly paying themselves unearned commissions.
Scola cited evidence that the activities of Wells and QBE, an Australian insurer that administers Wells' force-placed insurance program, amounted to unjust enrichment and a breach of good faith. In a sometimes harshly worded opinion, Judge Scola accused the bank of threatening to retaliate against the 20,000 homeowners eligible to become class members in the Florida litigation.
"Wells Fargo has unabashedly set out its threats to retaliate against any homeowner seeking to avoid alleged excessive and inflated force-placed insurance premiums," Scola wrote. The judge added that he intends to prevent the bank from "establishing post-litigation, vindictive business practices."
For Wells and QBE the stakes are large, with more than $50 million in premiums at issue in Florida alone. Evidence introduced into the public record in the case could result in further headaches at a time when banks force-placed insurance practices face significant scrutiny. New York State's Department of Financial Services has sent out numerous subpoenas to banks and insurers as part of an ongoing investigation, and the Office of the Comptroller of the Currency has also expressed interest in force-placed market.
QBE pays out 40% of total force-placed premiums as commission to its subsidiaries and Wells Fargo, the Florida plaintiffs charge. And only 7.6 cents of every dollar of premium revenue QBE collects goes to paying claims, according to a plaintiffs' analysis based on QBE data. Such a low payout ratio would be regarded as unacceptable in most states. Guidelines laid out by the National Association of Insurance Commissioners instruct insurers to aim for a payout of 60%.
Attorneys for the plaintiffs also attacked how QBE sets its rates. Camley Delach served as QBE's lone actuary for force-place policies written on behalf of Wells Fargo in Florida, according to a deposition discussed at the class certification hearing. It was her job to gauge the financial risks the underwriter faced. But Delach said in a deposition that she works from her Pennsylvania home, performs no actuarial work to determine QBE's prices, and has "no idea" why QBE prices its policies the way it does.
"It is not necessary for someone to be an actuary to critique this procedure," Judge Scola wrote in his opinion certifying the plaintiff class.
The information about the Wells and QBE practices was presented in open court on February 9. American Banker obtained the case files when they were originally posted to PACER, an online database of federal court records.
Wells Fargo and QBE accused plaintiffs attorneys of "misconduct" for bringing the information into a public forum. "Defendants have done everything within their control to protect the confidentiality of their business information," Wells and QBE stated.
The defendants subsequently argued to the court that a "manifest injustice" would occur if the details of their business relationship were made public. The court agreed on February 22 to seal or redact related information, including much of that described above.
Emails presented in those documents suggest that Wells employees themselves were uncomfortable with the high premiums QBE was charging Wells' borrowers. Following an American Banker article alleging that force-placed insurers were charging as much as 10 times the cost of borrowers' previous hazard insurance, an unnamed Wells executive allegedly told colleagues that the bank needed to rein QBE in.
"[P]remium pricing in unregulated states [those where QBE is not subject state rate caps] is unacceptable, requires immediate address, significant quality/oversight concerns based on loan cited in AB [American Banker] article and the issue found by Escrow team," an unnamed Wells executive wrote in an email to colleagues that was read by a plaintiffs' attorney in court and cited in a now-sealed PowerPoint presentation. These issues needed to be raised with "senior QBE leadership," the Wells official wrote.
"The quotes from Wells Fargo emails were taken out of context," Wells Fargo spokesman Tom Goyda wrote to American Banker last week. In a subsequent email, Goyda called the class certification a "procedural" matter and said that Wells has no intention" of retaliating against borrowers as the judge suggested. QBE declined to comment on the case.
In court, the defendants have argued that their high margins on Florida policies are warranted by risks posed by hurricane-related losses.
Arguments made in the certification hearing suggest that the plaintiffs' intend to focus their case on QBE's "surplus line" status. As a 2011 American Banker story reported, surplus line status exempts QBE from state rate caps and enables it to charge Wells Fargo borrowers whatever the bank will allow. In return, QBE pays Wells commissions on every policy written, even though the bank directly performs little or no force-placed work. Plaintiffs attorneys and consumer advocates have labeled this a pay-to-play arrangement, a charge the defendants deny.
By law insurance agents obligated to seek to buy coverage from state-regulated insurers first and only in the absence of such an option to resort to surplus-line coverage. To protect borrowers and regulated carriers, insurance agents are supposed to document a "diligent effort" to find a regulated insurer. In the case of the Florida defendants, QBE used its own employee, Michael Seminario, as the insurance agent.
Criticism of force-placed insurers goes beyond those selling surplus-line coverage. Assurant Inc. is dominant participant in Florida's force-placed market and is regulated in every other state in which it operates.
A 2010 American Banker story found that homeowner complaints about Assurant and QBE were similar, with both companies being accused of paying unearned commissions to banks, charging high rates and backdating policies to boost premium revenues. One difference is that Assurant's financial filings indicate it pays out the equivalent of 35% of premiums in claims.
"In submitting filings, our actuarial team considers a number of factors including actual experience over a multi-year period, reinsurance costs, and the significant catastrophe exposures and potential loss costs in Florida to help establish our rates," an Assurant spokeswoman wrote in an email.
QBE's unregulated status in some states — and its freedom to charge whatever premiums it wishes — may put it and its bank clients front-and-center in force-placed litigation. Wells argued during the February 9 class certification hearing that borrowers charged for force-placed insurance could have avoided it and therefore should not be permitted to sue over its allegedly inflated price. The court was not persuaded.
"That's like a defense for usury," Judge Scola said. "[Y]ou are going to have a defense that they live a bad lifestyle which leads them to be more in a position to be taken advantage of...? That makes no sense."
Following the Florida class certification, plaintiffs' attorneys intend to file similar suits in other jurisdictions.
"There will likely be national class actions," says Jeff Golant, one of the plaintiffs' attorneys on the case.