This is part of a series of posted articles on Force-Placed, Lender-Placed Insurance under standard Mortgage provisions. See also the articles posted here on March 5, 2013 and March 24, 2013, and the article posted on Insurance Claims and Issues Blog on March 13, 2013.
See also the article written by the author on the same subject of Force-placed, Lender-placed insurance, "Force-placed, Lender-placed Insurance Class Actions: Is the Lender Placement of Insurance Authorized by Law, Or Simply Beyond the Reach of the Courts?" which was published earlier this year in 35 Insurance Litigation Reporter 221 (May 2013).
It is important to recall that the subject of the case law developed throughout these articles, is NOT "Bad Faith" alleged against Insurance Companies under Insurance Policies but instead an examination of the recognized claims and causes of action against Mortgagees and their Mortgage Servicers in some situations, over their alleged bad faith or unfair forced placement of the costs of insurance on Mortgagors-Borrowers.
1. Breach of Contract. The most frequently alleged claim or cause of action in force-placed insurance cases is breach of contract.[1] Most Federal Courts in most cases have denied Rule 12(b)(6) motions to dismiss for failure to state a breach of contract claim upon which relief could be granted. The Federal Courts and State Courts alike have resolved several problems inherent in the allegations of breach of contract in these cases.
Only a party to a contract can breach the contract. It has therefore been held that a mortgage servicer is not ordinarily a party to the mortgage contract. For that reason, a mortgage servicer will ordinarily be dismissed from a lawsuit or claim alleging only breach of a contract to which the mortgage servicer is not a party.[2]
As discussed in previous posts, there are majority and minority views among the Courts on the issue of whether a lender can force the placement of insurance in amounts above the amount of the loan balance. Following the minority view, for example, which is that a lender (or Mortgagee) can force the placement of insurance in amounts which exceed the remaining balance of the loan, a District Judge wrote that "[t]his order finds that Wells Fargo did not breach its contract with plaintiffs simply by requiring flood insurance above the minimum amount required by federal law. Plaintiffs have not alleged that the $58,000 of insurance required and purchased by Wells Fargo for their property was over and above the replacement cost value."[3]
[1] E.g., Lass v. Bank of America, N.A., 695 F.3d 129, 135, 137 (1st Cir. 2012)(Massachusetts law); Kolbe v. BAC Home Loans Servicing, LP,695 F.3d 111, 121-22 (1st Cir. 2012)(New Jersey law). It is important to point out that the breach of contract claims alleged in the force-placed insurance cases are based on the same standard contract documents, including mortgage document forms posted on Freddie Mac's website, which the defendant lenders cite as their authority to force the placement of insurance in the first place. "This language provides a basis for the claim that Defendants may force-place insurance only to the extent such insurance 'is necessary' to protect the property's value and Defendants' rights in the property." McNeary-Calloway v. JP Morgan Chase Bank, N.A., 863 F. Supp. 2d 928, 956 (N.D. Cal. 2012)(Spero, USMJ). Accord, Ellsworth v. U.S. Bank, N.A., 2012 WL 6176905 *16 (N.D. Cal. December 11, 2012)(Beeler, USMJ).
[2] Cannon v. Wells Fargo Bank N.A., 2013 WL 132450 *22 (N.D. Cal. January 9, 2013). See McKenzie v. Wells Fargo Home Mort., Inc., 2012 WL 5372120 *20 n.12 (N.D. Cal. October 30, 2012; Spero, USMJ).
[3] Lane v. Wells Fargo Bank N.A., 2013 WL 269133 *9 (N.D. Cal. January 24, 2013)(holding that lender's security interest included replacement cost value). [Emphasis added.]
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