This article continues a series begun here on Sunday, November 11, 2012, "Two Decisions on Bad Faith and Force-Placed Flood Insurance."
One of the two class actions involves New Jersey law: Kolbe v. BAC Home Loans Servicing, LP d/b/a Bank of America, 695 F.3d 111 (1st Cir. September 21, 2012).
THE Kolbe FEDERAL CLASS ACTION: FORCE-PLACED FLOOD INSURANCE AND NEW JERSEY BAD FAITH LAW.
In Kolbe, Mr. Kolbe sued his mortgagee and the mortgagee’s subsidiary Insurer. Mr. Kolbe’s mortgage loan is guaranteed by FHA and tracks the FHA’s Model Mortgage Form for single-family homes.
The Form provides, in pertinent part, that the Borrower-Mortgagor shall keep Insurance “against any hazards, casualties, and contingencies, including fire, for which Lender shall require insurance,” and in amounts that the Lender requires.
“[A]lso,” the Borrower shall insure “against loss by floods to the extent required” by HUD. Kolbe v. BAC Home Loans etc., 695 F.3d 111, 114 (1st Cir. 2012). [Emphasis added.]
Bank of America took over Mr. Kolbe’s loan. Through its insurance subsidiary, BOA sent Kolbe notices that purported to require additional Flood Insurance, at Kolbe’s expense, or BOA would force-place the Flood Insurance at Kolbe’s expense.
Mr. Kolbe “bought the additional $46,000 in flood insurance.” Kolbe v. BAC Home Loans Servicing, LP, etc., 695 F.3d 111, 115 (1st Cir. 2012). Then Mr. Kolbe sued. Among the Claims he alleged were Claims for alleged Bad Faith. Further, he brought all his Claims as a class action.
Mr. Kolbe filed a class action alleging, among other things, that BOA and its Insurance subsidiary, Balboa, breached the mortgage contract’s implied covenant of Good Faith and Fair Dealing, including by:
- Increasing the Coverage without authorization in the contract.
- Implementing a national policy “of compelling borrowers to maintain greater flood insurance than required by their mortgages or federal law.”
- Profiting “from this improper policy” by force-placing the Insurance “through its own affiliated companies and brokers.”
Kolbe v. BAC Home Loans Servicing, LP, etc., 695 F.3d 111, 115 (1st Cir. 2012).
JUDGES DECIDE LAWSUITS, NOT LEGISLATIVE POLICIES.
What was not at issue in this Court case, however, was the question whether obtaining higher limits of Flood Insurance Coverage was a good decision.
The First Circuit acknowledged “that lenders may have good reason to require full replacement coverage” and thus to seek increased Flood Insurance limits accordingly, but that Congress appears to have reached a different policy conclusion in this regard.
“The question, of course, is not what amount of flood insurance a lender reasonably could require, but what this particular HUD mortgage provision in fact permits the lender to demand.” Kolbe v. BAC Home Loans Servicing, LP, etc., 695 F.3d 111, 121 (1st Cir. 2012). [Emphasis added.]
THE HOLDINGS OF NEW JERSEY BAD FAITH LAW IN THE Kolbe FORCE-PLACED FLOOD INSURANCE CLASS ACTION.
The First Circuit read the Mortgage together with the HUD requirements in this case, and found an ambiguity which, if the allegation stood alone that the Lender did not have authority to demand increased Coverage, would not have given rise to an actionable Bad Faith claim. However, the other allegations stated Bad Faith claims upon which relief could be granted under New Jersey law, the First Circuit held:
- The “ultimatum” that if Kolbe did not buy the increased Coverage, the Lender would do so, and then send Kolbe the bill.
- The “ultimatum” could also constitute actionable Bad Faith if the Lender knew “yet seized upon the ambiguity as a money-making opportunity.”
Kolbe v. BAC Home Loans Servicing, LP, etc., 695 F.3d 111, 123 (1st Cir. 2012).
The amended complaint stood dismissed as against Balboa Insurance, however, because there were no allegations “showing a contractual relationship between Kolbe and Balboa”. Id. at 125.
To be continued ....
Dennis Wall is a featured speaker at this year's National Forum on Bad Faith Litigation in Orlando, Florida on November 28 and 29, 2012. Readers of this blog can receive a discount on registration through I believe November 15, 2012 it is, by mentioning my name as a Speaker at this Forum at the time of registration. Here is the American Conference Institute's website: www.americanconference.com/badfaith.
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