9th Circuit Questions Ruling that Filed Rate Doctrine Bars Kickback Claims

Nearly a decade after regulators first heard allegations that carriers were paying kickbacks to mortgage servicers who purchased lender-placed insurance policies, a federal appellate court is asking the Washington Supreme Court to help resolve one of the last remaining lawsuits concerning alleged abuses.

The 9th Circuit Court of Appeals on Dec. 31 asked the state’s high court whether unjust enrichment and racketeering claims by a homeowner are barred by a judicial principle known as the “filed rate doctrine.” In essence, the 9th Circuit wants to know if a lawsuit filed against a subsidiary of NationStar Mortgage fails because the homeowner was charged a rate that had been filed with the Washington state insurance commissioner.

“Because this critical question of state law is not settled, we have concluded that the appropriate course of action is to certify questions regarding this issue to the Washington State Supreme Court, and we respectfully request that it provide the answer,” the 9th Circuit said in its order.

Almost all mortgage contracts come with a requirement that the borrower buy adequate insurance. If a homeowner allows coverage to lapse, the mortgage servicer will buy a lender-placed, or force-placed policy to protect the creditor.

In 2012, the Center for Economic Justice charged that two insurers — Assurant and QBE/Balboa — controlled 98% of the lender-placed homeowner’s insurance market and were charging homeowners excessive rates while paying “commissions” and other fees to mortgage servicers that purchased policies while billing the homeowners for the cost.

CEJ Executive Director Birny Birnbaum, a former chief economist for the Texas Department of Insurance, testified during a hearing before the National Association of Insurance Commissioners that insurance regulators had allowed “reverse competition” to develop in the credit insurance market because the higher the cost of the insurance the more money the mortgage services made on commissions. He said LIP insurers were enjoy loss ratios of less than 20%.

Homeowners who were forced to pay premiums for lender-placed insurance filed at least four lawsuits against NationStar Mortgage and its subsidiary Harwood Service Co., a database of federal court cases shows. Some of those suits cite Birnbaum’s testimony before NAIC to support allegations that insurers were paying illegal kickbacks and excessive fees to mortgage servicers while charging excessive rates.

Two of those lawsuits were settled and a third was dismissed after state attorneys general took legal action against insurers and Fannie Mae and Freddie Mac reformed mortgage-servicing rules. However, a lawsuit filed in 2015 by Seattle homeowner Spencer Alpert remains unresolved.

NationStar’s mortgage service, Harwood, bought a lender-placed policy on Alpert’s home in Seattle’s Blue Ridge neighborhood in 2012, after Safeco canceled his policy because he had failed to remove moss from the roof of the home. The $5,088 annual cost of the policy was charged to Alpert’s escrow account.

The Associated Press reported in 2014 that Harwood the year before had collected $40 million on commissions for $200 million in insurance billed to homeowners. Rules by the Federal Housing Finance Agency, state regulators and class-action settlementsnow prohibit such commissions.

Alpert filed a lawsuit in 2015 charging that Nationstar and Harwood had accepted kickbacks from Assurant subsidiaries and charged excessive rates. The suit says Alpert was forced to pay $17,318 for insurance from October 2012 to July 2015, when he purchased a new policy with an annual premium of $1,369.

“It is notable that the Commerce West Insurance coverage includes personal property, liability and other risk coverage included in the Nationstar/Assurant defendant force-placed policies,” the lawsuit says.

But U.S. District Judge Richard A. Jones found that the filed rate doctrine bars Alpert’s kickback claims. Jones wrote in his order that Alpert was essentially asking for a rebate on the premiums that he paid. If the court granted that request, he said, that would render the insurers’ filed rates inequitable because other homeowners who paid premiums would not receive the same rebate.

In ruling on Alpert’s appeal, the 9th Circuit noted that Nationstar and Harwood are intermediaries — they themselves did not file the rate in question.

“Accordingly, we are faced with the issue of whether, under Washington law, the filed rate doctrine applies to situations in which the filed rate is charged by an intermediary and not the regulated entity that filed the rate,” the court said.

While the Supreme Court waits for the Washington Supreme Court to respond, controversy over the regulations that govern lender-placed policies continues.

A lender-placed insurance working committee appointed by the National Council of Insurance Commissioners completed work in December on a model law to govern the practices of lender-based insurers. It will be considered by NAIC’s Executive Committee during its spring national committee, a spokeswoman for the organization said.

Birnbaum said in an interview that the proposed model law does nothing more that “memorialize” the current practices used by carriers and makes no meaningful changes that address excessive rates.

Birnbaum also challenges Nationstar’s argument that the filed rate doctrine bars Alpert’s cliam.

“It makes no more sense to invoke the filed rate doctrine for charges styled as insurance from a servicer to a borrower than it would to invoke the FRD for a charge by a landlord to a tenant styled as insurance,” he said.