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Financial Services Law Insights and Observations

California Federal Court Certifies Class in Forced Placement Insurance Dispute

State Issues

On May 10, the U.S. District Court for the Northern District of California certified a class of plaintiffs in a case involving the forced placement of homeowner’s insurance.Wahl v. American Security Insurance Co., No. C 08-00555, 2010 WL 1881126 (N.D. Cal. May 10, 2010). In Wahl, the plaintiff borrower entered a mortgage loan agreement that required her to maintain homeowner’s insurance. Her insurance policy provided that, if she failed to pay any premium, the insurer would notify her mortgage lender and servicer of a lapse in coverage “after 60 days from and within 120 days after” the due date. The borrower failed to pay a premium, and the insurer cancelled her policy and sent a notice of cancellation to the holder of her loan less than 30 days after the missed payment. The loan holder had a force placement contract with the defendant force placement insurer that provided for force placed coverage to become effective immediately upon a lapse in the borrower’s coverage. The loan holder twice notified the borrower that it had force placed coverage and that the coverage would be more expensive than insurance that she could independently obtain, but because the borrower did not purchase her own coverage, two years of coverage were force placed. The borrower alleged, on behalf of a putative class, that the insurer (i) breached the statutory duty to disclose, (ii) engaged in constructive fraud, and (iii) violated California’s Unfair Competition Law (UCL) by force placing insurance during the 60-day grace period afforded by the borrower’s insurance policy. The court granted class certification under the UCL, finding that the borrower sufficiently alleged that the insurer acted “unfairly” under the UCL’s (i) legislative intent test, because certain statutory language showed the legislature’s intent to prohibit coercion and restraint of trade in connection with insurance transactions, and (ii) balancing test, because the “societal utility” of immediately replacing the borrower’s coverage during the 60-day period was unclear. The court, however, granted the insurer’s motion for judgment on the pleadings on the breach of statutory duty to disclose and constructive fraud claims.

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