New York Federal Judge Upholds Class-Action Case Against Balboa Insurance

The ruling in U.S. District Court for the Southern District of New York by Judge Alison Nathan denied an attempt by Balboa Insurance and other defendants to dismiss the case. Balboa Insurance Co. and Balboa subsidiary Meritplan Insurance Co. are alleged to have been involved in the scheme. QBE, which owns Balboa Insurance, would not comment on the pending legal action.

Lender-placed insurance is typically purchased by lenders at a specified rate from insurers if homeowners fail to renew hazard insurance policies. The plaintiffs claim Balboa, GMACM and other defendants engaged in an enterprise that violated the Racketeer Influenced and Corrupt Organizations Act by defrauding borrowers by forcing them to pay for overpriced insurance.

GMACM had an agreement with Balboa and Meritplan to buy the product for loans it serviced from the insurers and the insurers would allegedly provide GMACM with kickbacks, the lawsuit claims. Plaintiffs said the kickbacks were in two forms. In one, GMACM hired a subcontractor --- an affiliate agent of Balboa and Meritplan --- to perform insurance tracking. But the insurers paid the subcontractor's bills for GMACM, instead of billing them for the post-kickback costs GMACM paid for the insurance. In the other, Balboa and Meritplan are alleged to have sent part of the payments received from GMACM to a third party, who would secretly return the amounts to GMACM and the company would then pass the cost originally paid to insurers on to customers instead of billing insurers for the kickback cost GMACM paid to obtain the lender-placed insurance.

While the original insurance cost for GMACM bought from Balboa and Meritplan used regulator-approved rates, the plaintiffs claim the defendants misrepresented the fact that bills did not reflect the costs GMACM paid for the product and that they were over billed.

Nathan's ruling rejected the call that the claims should have been dismissed under the filed rate doctrine, which bars all claims of unreasonable rates against regulated utilities. The insurers argued that dismissal was mandatory in this case because the filed rate doctrine bars claims challenging the bills customer receive, because they were based on rates approved by regulators. But Nathan ruled GMACM and the insurers failed to demonstrate that the amounts billed were filed with and approved by regulators. She ruled the defendants did not support their claim that the court should grant status to rates designed and approved for lenders when the rates are secondarily billed by lenders to borrowers instead.

The defendants also failed to have RICO conspiracy claims dismissed. The court rejected their claim that letters sent to plaintiffs regarding lender-placed insurance were unlikely to deceive anyone and that plaintiffs would have responded differently had that been the case. A Balboa affiliate, Newport Management Corp., sent letters and warnings about the product to plaintiffs and the complaint said Newport misrepresented the amount to be billed. Nathan also ruled the plaintiffs had determined the intent to deceive or defraud as required by RICO.

"It is fair to infer from the facts alleged that defendants had a strong financial interest in maintaining their relationship with GMACM and would return a portion of GMACM's insurance cost to GMACM as a kickback," the ruling said. "It is fair to infer from the facts alleged that defendants had a strong financial interest in maintaining their relationship with GMACM, that they knew that the actual costs of LPI for GMACM were lower than the amounts being asserted in the letters sent to plaintiffs and that they sent the notices containing the material misrepresentations."

Balboa has already been involved in one legal battle over force-placed lending. In April, QBE Insurance and the New York Department of Financial Services reached a $10 million settlement earlier this year over force-placed insurance practices. QBE Insurance was ordered to pay $4 million and Balboa Insurance Group was ordered to pay the remaining $6 million (Best's News Service, April 18, 2013).

QBE Insurance Corp. currently has a Best's Financial Strength Rating of A (Excellent). Balboa Insurance Group has a Best's Financial Strength Rating of A (Excellent).