Alert April 02, 2013

New York Department of Financial Services Settles with Force-Placed Insurer

Concluding an over year-long investigation (see April 17, 2012 Alert), New York’s Department of Financial Services announced a settlement with a force-placed insurer. DFS began investigating the insurer and its affiliates in October 2011 on insurance practices related to force-placed insurance. Among its findings, DFS concluded that despite the insurer and its affiliates’ low loss risks, the insurer maintained insurance rates that did not reflect its actual premium or loss experience. DFS also concluded that the insurer paid servicers excessive fees and commissions, and that the insurance did not provide comprehensive coverage for borrowers. For example, the insurance was often insufficient to cover the borrower’s personal property though providing extensive coverage for the structure.

Under the terms of the settlement, the insurer is prohibited from providing insurance or entering into reinsurance arrangements related to mortgage loans serviced by insurer-affiliated companies or offering financial incentives to servicers for selecting the insurer. The settlement also imposes restrictions on the amount of insurance that may be force placed and requires the insurer to re-file its rates with DFS for review every three years. The insurer is also required to pay a $14 million civil money penalty and restitution to property owners. The settlement with the force-placed insurer is part of a growing trend to reform the industry. Previously, the California Department of Insurance announced an agreement with another force-placed insurer leading to reduced rates for consumers (see November 13, 2012 Alert). Also, as noted above, the FHFA moved to place restrictions on force-placed insurance citing risks to the government-sponsored enterprises for which it serves as conservator.