A federal appeals court has made it much tougher to sue banks that buy insurance for borrowers who let their own policies lapse.
The U.S. Court of Appeals for the Sixth Circuit in Cincinnati ruled Monday that Bank One did not violate the civil racketeering laws when it received a commission after buying car insurance for Barbara Kenty, one of its borrowers.
The court noted that Ms. Kenty's loan agreement specifically authorized the bank to purchase insurance on her behalf if she defaulted on her policy. Also, the contract did not prevent the bank from receiving a commission for buying the policy, the court said.
The practice of buying insurance for borrowers who default on their own policies - known as force-placed insurance - is common in banking. Lenders buy the policies to protect their collateral. They then add the cost of the insurance to the loan. Consumers have sued banks, charging they illegally pocketed the commission. This decision reserves an earlier ruling by the same court in favor of Ms. Kenty.