Contingent liability of the day, force-placed insurance edition

By Felix Salmon
January 19, 2012
report on the force-placed insurance scandal, and only now does it seem like the other shoe might be beginning to drop, with the enormous monetary settlements that probably implies.

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The wheels of justice grind slowly — it’s well over a year since Jeff Horwitz’s stunning report on the force-placed insurance scandal, and only now does it seem like the other shoe might be beginning to drop, with the enormous monetary settlements that probably implies.

In his latest update, Horwitz fills us in on what’s going on: there’s not only a big investigation by New York State’s Department of Financial Services, but there’s also a separate investigation by the broad coalition of state attorneys general, as part of the mortgage-servicing settlement which never seems to get anywhere. On top of that, the Consumer Financial Protection Bureau might be getting involved as well.

And then there’s private litigation, led by a four-firm, ten-lawyer class action effort in Florida. As Horwitz writes, it’s too early to know how all these suits will turn out, but what precedent we have is not looking good for the banks:

The suits are generally in their early stages. But the only one to have advanced past class certification, Hofstetter v. Chase Home Finance LLC, suggests serious trouble for banks.

In depositions made public following the defense’s failure to properly request confidentiality from the court, Chase employees described a system in which Chase collects hefty commissions on force-placed insurance — yet does no work in relation to the policies.

“What function does Chase Insurance Agency, Inc. perform with respect to flood insurance?” the plaintiffs’ attorney asked in a deposition.

“I would say no function,” Chase’s employee responded…

One Chase employee testified that, despite Chase Insurance Agency Inc.’s name, the division employs absolutely no insurance agents.

Chase settled that one case for an eight-figure sum; there will certainly be more where that came from. I only wonder whether the banks might not be hoping that a big umbrella deal with the state attorneys general might give them some kind of immunity against these class actions.

In many ways, the banks don’t want to settle: they’d rather fight, and keep their money while doing so, even if fighting ends up costing them more over the long term. Better to push off losses onto your successor than be responsible for them yourself. And probably the expected losses on class actions related to force-placed insurance won’t make the difference between the banks making or rejecting any proposed offer. But Horwitz’s story is an important reminder that banks’ contingent litigation liabilities are enormous, and largely unknown. Which is one reason, surely, why they’re all trading at such low ratios these days.

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