New York Continues Pressure on Force-Placed Insurance

Force-placed insurance remains in the crosshairs of New York financial regulators. Last week, the state’s Department of Financial Services (DFS) sent a warning letter to all New York-licensed insurance producers about force-placed insurance tracking services.

The DFS sent the letter in response to reports that insurance producers unaffiliated with insurers were offering insurance tracking services to mortgage lenders and servicers for a reduced fee or no separately identifiable charge. According to the letter, the practice’s purpose is “to induce the mortgage servicer or lender to procure force-placed insurance through the producer” upon notification that a borrower’s insurance has lapsed or otherwise terminated.

The letter states that it is intended “to provide guidance and clarification” to insurance producers about this practice. It cites New York Insurance Law Section 2324(a), which prohibits a licensed insurance producer from paying a premium rebate to an insured or giving or offering to give “any valuable consideration or inducement, not specified in the insurance policy or contract” that exceeds $25 in value. It also cites an exception for services that directly relate to the sale or servicing of a policy that a producer sold, solicited, or negotiated.

Observing that “insurance tracking services likely exceed $25 in value,” the DFS warns that any insurance producer, including an excess line broker, that is not affiliated with an insurer would violate Section 2324(a) by offering for a reduced fee or no separately identifiable charge to track insurance that the producer did not sell, solicit, or negotiate. (We note, however, that although Section 2324(a) has an express $25 exception to the prohibition against giving or offering any valuable consideration or inducement, there is no such express exception to the federal Real Estate Settlement Procedures Act's referral fee or fee-splitting prohibitions.)

Force-placed insurance has been a major focus of the DFS since it launched an investigation of the industry in 2011 and held hearings in 2012. Earlier this year, the DFS entered into settlements with the nation’s largest and second-largest force-placed insurers. Those settlements included provisions requiring the insurers to make refunds to consumers, addressing permissible loss ratios for setting premium rates, and prohibiting certain commission and reinsurance practices.

Force-placed insurance is also a focus of the Consumer Financial Protection Bureau’s new mortgage servicing rules that become effective January 10, 2014. Those rules implement provisions of Title XIV of the Dodd-Frank Act that give consumers additional rights concerning the force placement of insurance by servicers. The rules include a requirement that servicers provide advance notice and pricing information before charging borrowers for the insurance.