New York Obtains Major Lender-Placed Insurance Settlement

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On March 21, the New York Department of Financial Services (DFS) announced that it obtained a settlement from a major lender-placed insurer to resolve an investigation into the company’s practices. According to the DFS, the insurer allegedly drove up the price of lender-placed insurance by effectively offering banks a share in its profits by: (i) paying commissions to insurance agents and brokers affiliated with the banks even though the agents and brokers did not perform the customary tasks that would justify a commission, (ii) paying banks’ “expenses” related to lender-placed insurance, (iii) paying lump sum amounts, such as one bank’s $1 million termination fee for switching its business to another insurer, and (iv) allowing a reinsurance company owned by a bank to take as much as 75 percent of the premium. The DFS cited the insurer’s low loss ratio as evidence of how profitable lender-placed insurance has been for the insurer. The settlement agreement requires the insurer pay restitution to borrowers who were lender-placed after January 1, 2008 and meet certain criteria, as well as a $14 million penalty. The insurer also must (i) take specific steps to lower the cost of non-flood lender-placed insurance, (ii) cease numerous delineated practices, (iii) provide improved disclosures and notices to borrowers; (iv) improve its email retention policy; and (v) ensure that the amount of coverage lender-placed on any homeowner does not exceed the last known amount of coverage.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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