On September 7, 2016, Attorney General Maura Healey’s Office announce that force-placed insurer. QBE Insurance Corporation (“QBE Insurance”) and its affiliate, QBE Financial Institution Risk Services, Inc. (“QBE FIRST”) had agreed to an assurance of discontinuance under G.L. c. 93A, § 5, that will reimburse homeowners who were improperly charged for force-placed insurance policies. Under the terms of the assurance of discontinuance, the insurer and its affiliate agreed to reimburse homeowners who have been improperly charged for forced-placed insurance and to pay the state $375,000.
Forced-placed insurance purchased by mortgage company but paid by homeowner
Force-placed insurance is property insurance taken out by a mortgage lender to protect a home when homeowner do not maintain property insurance as required by the mortgage agreement.
When a borrower is believed to have failed to maintain appropriate coverage, the insurer issues a force-placed insurance policy and the mortgage servicer charges the premium for the policy to the borrower.
QBE Insurance was, before its sale to National General Insurance in 2015 the second largest writer of forced-placed insurance in the United States.
The other party to the assurance of discontinuance, QBE FIRST, was an affiliate of the insurer that contracted with lenders, builders, and other financial institutions to monitor and ensure that commercial and residential mortgage borrowers are carrying appropriate insurance policies, and to purchase lender-placed mortgage hazard when it believed the mortgagor had breached the insuring agreement of a mortgage.
QBE Insurance was the insurance company used in many cases by QBE FIRST for placement of the force-placed insurance.
QBE Settlement requires restitution, audit by attorney general, and payment of $375 thousand
Under the terms of the assurance of discontinuance signed by QBE Insurance and filed with the Suffolk Superior Court, QBE Insurance will have to pay refunds to Massachusetts homeowners whose mortgage lenders wrongly force-placed the consumers with QBE despite the fact that the consumers already had home insurance with other companies, as well as consumers who were overcharged by QBE because their homes were misclassified as commercial properties.
“We will continue to ensure that mortgage lenders and their insurance business partners do not overcharge Massachusetts residents or force them to pay for unnecessary insurance,” AG Healey said. “Today’s agreement provides Massachusetts homeowners the restitution they deserve.”
The AG’s Office will conduct an audit to ensure all eligible consumers receive full restitution. To date, the AG’s Office has identified potentially improper charges that could result in more than $1 million in relief to Massachusetts homeowners. Aside from amounts identified in the audit, the agreement also requires QBE to pay $375,000 to the state.
Third settlement by Attorney General in last ten months for force-placed insurance abuses
The settlement with QBE Insurance and QBE FIRST marks third settlement with parties involved in the forced-place insurance industry by Attorney General Healey within the last ten months.
On November 23, 2015, the Attorney General filed an Assurance of Discontinuance where the largest writer of force-placed insurance, American Security Insurance Company, a subsidiary of Assurant, agreed to pay the state $565,000 and provide full refunds to thousands of Massachusetts homeowners who were properly insured but charged for force-placed by a mortgage servicer or who were improperly charged commercial premium rates. See Agency Checklists article of December 8, 2015, “Restitution For Thousands Of Mass. Homeowners Overcharged For Force-Placed Insurance.”
On February 18, 2016 a national mortgage lender and servicer, HSBC, paid $4 million to the state and consumers resulting from the improper compensation it received tied to force-placed insurance that the Attorney General claimed created an improper conflict of interest and violated state consumer protection laws.
Under the terms of the Assurance of Discontinuance, HSBC agreed not to accept commissions, profit-sharing, or reinsurance proceeds or any free or below market value services from insurance carriers that it uses to write force-placed insurance policies on Massachusetts borrowers’ properties in connection with force-placed insurance policies. “HSBC to Pay $4 Million, Refund Homeowners for Accepting Compensation Tied to Force-Placed Insurance.”
Force-placed carriers charged higher premiums to homeowners to pay kickbacks to banks and mortgage service companies
A 2011 investigation by the New York Department of Financial Services revealed that the premiums charged to homeowners for force-placed insurance were two to ten times higher than premiums for voluntary insurance — despite the fact that force-placed insurance provides less protection for homeowners than voluntary insurance.
This same investigation gave the reason for these obscenely high rates as “reverse competition.”
According to the report, force-placed insurers vied with each other to pay mortgage companies and banks holding a consumers’ mortgage, commissions and reinsurance participations in the force-placed writings arising out of their loan portfolios.
Normal competition to provide the lowest price to the homeowners paying the force-placed insurance premiums disappeared as the insurers sought to buy the business through a share of the profits from force-placed insurance. These profit-sharing arrangements created incentives for banks and mortgage servicers to buy the highest-priced force-placed policies to get greater commissions at the expense of the unfortunate homeowners who had to pay up if they did not want the mortgage company or bank to foreclose.
These inflated rates generated large profits. For example, QBE filed rates with New York’s Department of Financial Services showing an expected loss ratio of 55 percent. The actual loss ratios for the three years prior to 2013 were 18.2 percent, 18 .5 percent, and 13.5 percent.
QBE Insurance Group paid $700 million for force-placed insurer in 2011 and sold it out in 2015 for $90 million: writing off $120 million
In 2011 QBE Insurance Group (“QBE”), one of the world’s top 20 general insurance and reinsurance companies, headquartered in Australia, purchased from Bank of America Corporation the Balboa Insurance Company’s force-placed insurance portfolio and rolled it into QBE Insurance.
QBE paid Bank of America $700 million upfront for the $1.2 billion Balboa Insurance portfolio it acquired.
As a result of the purchase, QBE Insurance became the second largest force-placed insurance insurer in the United States. Almost immediately the company picked up problems as in 2013, the New York Financial Services Department fined QBE Insurance $10 million after its probe of kickbacks the insurer had paid to banks in exchange for business.
Additionally, QBE Insurance became the target of class action suits arising out of the questionable dealings between mortgage services, banks and forced-placed insurers regarding commissions, fees and reinsurance transactions that jacked up forced-placed insurance rates to extremely high levels. The settlements of on class actions totaled $228 million.
In November 2015 the QBE Insurance Group exited the forced-placed insurance business by selling QBE Insurance and QBE First to National General Holdings Corporations for $90 million. The transaction resulted in a pretax loss of $120 million to the QBE Insurance Group for charges and write-offs.
Federal Agency clipped $150 million on force-placed insurance
It is not just consumers, however, that were fleeced by forced-place insurance practices.
The Federal Housing Finance Agency (FHFA), is the federal agency appointed in 2008 as the conservator of federally chartered Federal National Mortgage Association (Fannie Mae) and of Federal Home Loan Mortgage Corporation (Freddie Mac) that went bust in 2008.
A June 25, 2014 report by the FHFA’s Office of the Inspector General made the unequivocal recommendation that the agency sue mortgage servicing companies that dealt with Fannie Mae and Freddie Mac for overcharges on force-placed insurance placement in excess of $150 million. Fannie Mae and Freddie Mac had overpaid that amount, according to the report, under their mortgage servicing contracts when foreclosed homeowners could not pay exorbitant force-placed insurance premiums, Fannie Mae and Freddie Mac had the obligation to pay the force-placed insurance premiums.
Because of these abuses, the FHFA banned banks and mortgage servicers in June, 2014 from accepting commissions on force-placed insurance policies issued by affiliated companies.
