First Circuit Reinstates Two Force-Placed Insurance Class Actions

Mortgage Origination Class Action Mortgage Insurance

On September 21, the U.S. Court of Appeals for the First Circuit vacated a district court’s dismissal of two putative class actions brought by borrowers alleging that their mortgage lender improperly required borrowers to buy and maintain higher flood insurance coverage. Lass v. Bank of America, N.A., No. 11-2037, 2012 WL 4240504 (1st Cir. Sep. 21, 2012); Kolbe v. BAC Home Loans Servicing, LP, No. 11-2030, 2012 WL 4240298 (1st Cir. Sep. 21, 2012). Both named borrowers claim on their own behalf and that of similarly situated borrowers that the bank breached its contracts by requiring borrowers to purchase more flood insurance than contractually required. They also claim that the bank proceeded in bad faith by requiring that such insurance be purchased through backdated policies placed with the bank’s affiliates, which earned a kickback on the purchase. In Kolbe, while the court favored the borrower’s interpretation that the contract prohibits the lender from exercising discretion with regard to flood insurance, it held that the mortgage contract was ambiguous and susceptible to multiple interpretations. In Lass, the court held that while the borrower’s mortgage contract explicitly grants the lender discretion to set the amount of flood insurance required for the property, a “flood insurance notification” document provided to the borrower at closing may be read to state that the amount of insurance required at closing would not change during the term of the mortgage. The notification was part of the mortgage agreement and essentially completed that contract, the court held. Taken together, the court explained, the mortgage contract and flood insurance notification are ambiguous with regard to the lender’s authority to alter the flood insurance coverage requirement. Further, in both cases, the court held that the borrowers alleged sufficient facts to support their bad faith claims of the bank’s backdating and self-dealing. The court vacated the district court’s decisions on the lender’s motions to dismiss and remanded both cases for further proceedings. Notably, in Kolbe, the circuit court did not overturn the lower court’s dismissal of the plaintiff’s claims for breach of contract and breach of the implied covenant of god faith and fair dealing against the insurance carrier, noting that the complaint was devoid of allegations showing a contractual relationship between the plaintiff and the insurance carrier.