No Right to Sue Lender on Force Placed Insurance if Placed in Compliance With Contract
Mortgage holders require, as a matter of course, that borrowers insured the property that is the security for the loan, against certain risks of loss, and if the borrower does not place the insurance the mortgage contract gives the lender to place the required insurance itself at the expense of the borrower. In George P. Klika, v. Capital One Bank, N.A., United States District Court Civil Case No. C15-0107 RSL, 2016 WL 3551812 (06/30/2016) the USDC was called upon to deal with a proposed class action suit for wrongfully placing force placed insurance.
Plaintiff alleges that Capital One participated in a scheme to charge him and similarly-situated mortgagors excessive insurance premiums for unnecessary, unauthorized, or duplicative coverage. Plaintiff asserts that Capital One breached the mortgage agreement, breached the implied covenant of good faith and fair dealing, violated the Real Estate Settlement Procedures Act, violated Hawaii’s Deceptive Practices Act, and was unjustly enriched. Capital One seeks dismissal of all claims asserted against it, arguing that the allegations are insufficient to state a claim upon which relief could be granted and that, given the number of times plaintiff has asserted similar claims in the past, leave to amend should be denied.
In the context of a motion to dismiss, the Court’s review is generally limited to the contents of the complaint. The documents attached to plaintiff’s complaint, including the 2006 mortgage agreement, form the basis of his claims and have been considered in determining whether plaintiff has stated a viable cause of action.
A claim is facially plausible when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged. Plausibility requires pleading facts, as opposed to conclusory allegations or the formulaic recitation of elements of a cause of action, and must rise above the mere conceivability or possibility of unlawful conduct that entitles the pleader to relief. Nor is it enough that the complaint is factually neutral; rather, it must be factually suggestive.
BREACH OF CONTRACT
Paragraph 5 of the mortgage contract states in relevant part: “Borrower shall keep the improvements now existing or hereafter erected on the Property insured against loss by fire, hazards included within the term “extended coverage,” and any other hazards, including, but not limited to, earthquakes and floods, for which Lender requires insurance. This insurance shall be maintained in the amounts (including deductible levels) and for the periods that Lender requires.”
The contract also required: “If Borrower fails to maintain any of the coverages described above, Lender may obtain insurance coverage, at Lender’s option and Borrower’s expense. Lender is under no obligation to purchase any particular type or amount of coverage. Therefore, such coverage shall cover Lender, but might or might not protect Borrower.”
The mortgage agreement does not limit the lender to a policy in an amount that is equal to or less than the outstanding loan amount and that it grants the lender the right to require continuous coverage. Plaintiff’s claims of breach involving actions that were permitted by the contract fail as a matter of law. The lender’s right to act is not as broad as Capital One’s argument suggests, however: under the terms of the mortgage agreement, the lender cannot force-place insurance if the borrower already has in place all that the lender required.
At oral argument, plaintiff attempted to fit his claim into this box by asserting that he had in place a hazards policy that covered all of the risks that are specifically required by the policy and that were previously disclosed by the lender (including coverage for wind, perils of wind, and windstorm). Plaintiff stated that it was not until July 18, 2013, that Capital One first notified him that it was requiring hurricane insurance, by which time Capital One had already force-placed the insurance. If that were the state of affairs, a plausible breach of contract claim might be in the offing.
The facts alleged in the complaint and the documents attached thereto defeat such a claim, however. Whatever confusion may have arisen regarding Capital One’s insurance requirements prior to July 18, 2013, Capital One gave clear and unambiguous notice that it was requiring hurricane insurance – covering winds of 75 mph or more – on that date and provided plaintiff an opportunity to purchase the coverage himself. When he did not do so, Capital One purchased hurricane coverage, placing the charge on plaintiff’s escrow account on August 23, 2013, and notifying plaintiff of the purchase by letter dated August 29, 2013. Plaintiff had notice that hurricane insurance was required and failed to maintain the required coverage. In such circumstance, Paragraph 5 gave Capital One the right to act.
Plaintiff has not alleged a viable contract claim, nor has he proposed an amendment that is consistent with the facts of record. In the absence of any indication that the identified deficiencies can be remedied, leave to amend this claim was denied.
BREACH OF THE IMPLIED COVENANT OF GOOD FAITH AND FAIR DEALING
Plaintiff alleges that Capital One exercised its discretion to force-place insurance capriciously and in bad faith because it acted to maximize its own gain at the borrower’s expense. It is clear that plaintiff’s entire complaint rests on the various provisions of Paragraph 5 of the mortgage agreement. A reasonable person reading Paragraph 5 would understand that if the lender were forced to place coverage, the borrower would have to pay for that coverage.
Plausibility requires pleading facts, as opposed to conclusory allegations. Although it seems unlikely given plaintiff’s statements at oral argument, it is possible that he has additional facts that would tie his payment for the force-placed policy to Capital One’s receipt of a fee, commission, kickback, or some other direct financial benefit.
Leave to amend this claim is therefore GRANTED.
HAWAII’S DECEPTIVE PRACTICES ACT (“DPA”)
Plaintiff identifies twelve “unfair or deceptive acts or practices in the conduct of any trade or commerce” in which Capital One is alleged to have engaged in violation of statute. In particular, plaintiff alleges that the pre-arranged secret deals between Voyager and/or Assurant and Capital One to provide inadequate and/or unnecessary force-placed insurance at premium rates for the borrower and secret kickbacks, commissions, or fees for the lender are unfair and deceptive.
To the extent Capital One turned the purchase of insurance into a profit-making activity for itself, however, that information was not disclosed and theoretically gives rise to a cause of action.
On the chance that plaintiff has additional facts that would tie his payment for the force-placed policy to Capital One’s receipt of a direct financial benefit, such as the alleged fee, commission, or kickback, leave to amend this claim is GRANTED.
Plaintiff’s unjust enrichment theory is the same one that underlies his potentially viable breach of the implied covenant of good faith and DPA claims. Plaintiff has not, however, alleged non-conclusory facts in support of this claim.
DECLARATORY JUDGMENT/INJUNCTIVE RELIEF
All of plaintiff’s claims are deficient and will be dismissed, including his claim for declaratory and/or injunctive relief. If plaintiff is able to allege facts giving rise to a plausible substantive claim for relief, he may be entitled to equitable protection from future harms of the same sort.
CLASS ACTION ALLEGATIONS
For all of the foregoing reasons, Capital One’s motion to dismiss is granted. Plaintiff’s RICO, fraud, breach of contract and RESPA claims are hereby DISMISSED with prejudice and the class allegations are stricken. If plaintiff believes he can, consistent with his Rule 11 obligations, amend his breach of the implied covenant, DPA, unjust enrichment, and declaratory judgment/injunctive relief claims to allege non-conclusory facts in support of his theory that Capital One received a kickback, fee, commission, or some other direct financial benefit when it force-placed hurricane coverage on plaintiff’s property in August 2013, he may do so within fourteen days of the date of this Order.
If an adequate amendment is not timely filed, judgment will be entered with prejudice in favor of Capital One and against plaintiff. Capital One’s request for judicial notice is granted. Defense counsel shall, within seven days of the date of this date.
The court in this case generously allowed the plaintiff the opportunity to amend the complaint to find real facts, rather than conclusory statements which the court did not believe exist. Force placed insurance is appropriate if the mortgage contract allows it and although the cost is extreme, it is not more than a means for a mortgagor to protect its interests when the borrower fails to buy the required insurance.
Barry Zalma, Esq., CFE, practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business. He now limits his practice to service as an insurance consultant and expert witness 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.
Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.
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