Finding plausible the claims of two homeowners that lenders imposed unnecessary flood insurance requirements on their mortgages, a federal judge has refused to dismiss a class action complaint seeking refunds of premiums and injunctive relief.

Northern District Judge David Hurd (See Profile) allowed Casey v. Citibank, 5:12-cv-820, to go forward on claims of breach of contract, conversion, an alleged violation of the Truth in Lending Act, violation of the state’s Deceptive Practices Act, breach of the covenant of good faith and fair dealing, and breach of fiduciary duty.

Gordon Casey of Syracuse contends that his required insurance coverage increased from $25,000 in 2009 to $237,349 in 2012 while the outstanding amount on his mortgage fell to $17,000 from $25,000. His mandatory premiums for flood insurance jumped to $1,478 a year from $324.

The other plaintiff, Duane Skinner of Pasadena, Md., saw his annual premiums set at $2,250 in 2012 on a principal balance of $142,000. The previous year, before CitiMortgage began servicing his loan, no special flood insurance was required.

The suit is one of at least a half dozen filed in federal courts alleging that mortgage lenders demanded that customers, through a process called “force-placing,” insure properties against flood damage well in excess of what their lending contracts called for, and then accepted commissions from the insurers who collected the larger premiums.

The plaintiffs in all the actions allege that under the National Flood Insurance Program (NFIP), 42 U.S.C. §4012a(b)(1), lenders must ensure that flood insurance is secured on properties located within a Special Flood Hazard Area that is at least equal to the outstanding principal balance of the loan or the maximum insurance coverage requirement of $250,000 under the NFIP, whichever is less.

One action, Hofstetter v. Chase Home Finance, 10-cv-1313, settled in the Northern District of California in 2011 for $9.65 million. As part of the settlement between Chase and about 40,000 customers, Chase agreed to stop taking commissions from force-placed insurance policies and requiring coverage above what consumers owed on loans.

Another suit, Kolbe v. BAC Home Loans Servicing, 11-cv-10312, is scheduled to be heard en banc by the U.S. Court of Appeals for the First Circuit in Boston on Feb. 5.

Hurd said Kolbe and the circumstances around the claim of Gordon Casey, one of the plaintiffs in the New York action, are identical.

At issue in both cases is the meaning of a mortgage agreement stipulating that the “borrower shall insure all improvements on the Property, whether now in existence or subsequently erected, against any hazards, casualties, and contingencies, including fire, for which Lender requires insurance.” The contract further states that “this insurance shall be maintained in the amounts and for the periods that Lender requires.”

Citibank and the company that purchased the Casey mortgage in 2011, MidFirst Bank, both interpret the contract as meaning that they, as the “lender,” can set the appropriate amount of flood insurance coverage as long as it meets minimum requirements set by the U.S. Department of Housing and Urban Development. HUD defines the minimum as the outstanding amount of the loan.

Casey countered that the same language prohibits lenders from demanding higher coverage than is mandated by HUD. The First Circuit in Kolbe read the contract language in the way Casey urged in a Nov. 1, 2012, decision, 695 F.3d 111.

Hurd called the First Circuit’s initial reading of the contract language “well-reasoned” and “persuasive.” He said it was similar to the interpretation given the same contract language by an Eastern District of Pennsylvania judge in Wulf v. Bank of America, 798 F.Supp.2d 586 (2011).

“With regard to Casey’s loan, it is reasonable to interpret the contract language to mean that he need only maintain flood insurance coverage in an amount equal to the outstanding principal balance of his loan—or approximately $17,000,” Hurd wrote from Utica in his Jan. 2 ruling. “He thus states a plausible claim that defendants breached the contract by forcing him to purchase coverage in excess of that amount.”

The language of Skinner’s mortgage, which is held by Fannie Mae and serviced by CitiMortgage, states that the “lender” may set the flood insurance requirement. Hurd said he agreed with Skinner’s interpretation that Fannie Mae is the lender for purposes of the mortgage, not CitiMortgage.

“At this early stage of the litigation, it is reasonable to infer that Fannie Mae, not CitiMortgage, is the only ‘Lender’ with discretion to set and change the amount of flood insurance,” Hurd wrote. “Therefore, Skinner states a plausible claim that the Citi defendants breached the contract by force-placing flood insurance that was not required by Fannie Mae.”

Kai Richter of Nichols Kaster, an attorney for the plaintiffs, said the information gleaned through discovery that will follow from Hurd’s ruling will bear out the contention that Citibank, CitiMortgage and MidFirst received what he called “kickbacks” from insurers based on force-placed flood insurance premiums.

“No where are we saying that flood insurance is a bad idea,” said Richter, who is based in Minneapolis. “What we are saying is you have to be upfront about the requirement and you have to be consistent with the requirement.”

Richter predicted that the size of the class, if certified by the court, will be “in the thousands, if not the tens of thousands” of Citibank and MidFirst customers.

Attorneys from Berger & Montague of Philadelphia are also representing the plaintiffs.

Philadelphia-based Ballard Spahr, Menter, Rudin & Trivelpiece of Syracuse, Goodwin Procter of Boston and Costello, Cooney & Fearon of Syracuse are representing the defendants.

Mark Rodgers, director of Citi public affairs, said Citi gives customers the option of purchasing their own flood insurance before force-placing policies.

“Contrary to allegations in the complaint, we do not receive a commission for lender-placed flood insurance,” Rodgers said. “We understand insurance issues can be complex, and we work with customers to try to resolve them. Federal law dictates that if a property is in a Special Flood Hazard Area, lenders are required to enforce the purchase of flood insurance for as long as the property remains in one of those flood zones.”

@|Joel Stashenko can be contacted at jstashenko@alm.com.