New U.S. District Court Judge for the Northern District of Georgia Steve Jones. Photo by Zachary D. Porter/Daily Report 03/14/11
New U.S. District Court Judge for the Northern District of Georgia Steve Jones. Photo by Zachary D. Porter/Daily Report 03/14/11 (File)

An Alabama homeowner is suing a U.S. subsidiary of London bank HSBC in federal court in Atlanta, claiming it has engaged in a long-running illegal kickback scheme over homeowners insurance.

Alabama resident Robin Blackburn also is seeking class-action status. The proposed class includes anyone who has had a loan or line of credit with HSBC Finance Corp. or its affiliates that is secured by a home mortgage and who has been charged for a “force-placed” hazard or flood insurance policy. The suit also names as a defendant insurance company Assurant Inc. and American Security Insurance Co.

“Force-placed” insurance is purchased by a lender or mortgage servicer for mortgaged properties and then billed to the property owner to protect the lender’s interest in the property against fire, flood, wind or other hazards, according to the suit.

Although the suit acknowledges that lenders “generally have the right to force-placed insurance…where the property securing the loan is not insured by the borrower,” it claims that HSBC has “flagrantly” abused that right by back-dating force-placed insurance policies, billing excessive prices and accepting kickbacks from Assurant Inc.

“At issue is whether HSBC and Assurant have been unjustly enriched by manipulating the force-placed insurance process so as to systematically engage in a kickback scheme,” the plaintiff claims.

Regulators scrutinizing

According to the suit, which was filed in November, force-placed insurance practices are attracting the growing scrutiny of regulators across the country.

Last year, the superintendent of New York’s Department of Financial Services testified at state insurance hearings that an investigation on force-placed insurance uncovered “exponentially higher premiums” than regular homeowner’s insurance; serious harm to distressed borrowers because of a lack of market competition and because the costs were embedded in the mortgages; “tight relationships between banks, their subsidiaries and insurers” and “systematic kickback scheme.”

In September, Assurant and J.P Morgan Chase agreed to a $300 million settlement to resolve accusations that they forced homeowners into buying overpriced property insurance and entered into kickback arrangements that inflated policy prices.

An HSBC spokeswoman declined to comment on the case. Assurant spokesman Robert Byrd told the Daily Report, “We cannot comment on the specifics of the suit, but we intend to vigorously defend against the allegations in this case.” Assurant is represented locally by Christopher Allen Riley of Alston & Bird.

So far, no attorneys have filed notices of appearance on behalf of HSBC in the case.

Atlanta attorney David Bain, who is representing lead plaintiff Blackburn, also declined to comment.

In October, U.S. District Judge Steve Jones ruled that a $100 million suit brought by three metro Atlanta counties against HSBC Holdings Inc. and its U.S. subsidiaries—including HSBC Finance Corp., one of the defendant companies named in Blackburn’s suit—could go forward. The counties—Fulton, DeKalb and Cobb—have claimed that the defendants damaged their property tax bases by luring minority homeowners into loans they could not afford. The judge found that the counties had made plausible claims that HSBC had engaged in a reverse redlining scheme that targeted minority neighborhoods and intentionally stripped equity from the properties and homes it financed.

HSBC has also been the subject of a federal criminal investigation. In December 2012, HSBC and the U.S. Justice Department signed off on a $1.25 billion settlement in connection with allegations that HSBC and its affiliates around the world had illegally laundered hundreds of millions of dollars for drug cartels and foreign countries that were subject to diplomatic or trade sanctions.

Suit implicates Assurant

Blackburn’s suit alleges that HSBC preyed on borrowers like her by requiring many of them to pay for insurance coverage that far exceeded the amount necessary to protect HSBC’s interest in their mortgaged properties. The suit also claims that Assurant “actively participated” in the scheme “by issuing backdated force-placed insurance policies for HSBC and by agreeing with HSBC to pay kickbacks, commissions, or other compensation to HSBC in return for this lucrative business” in “a scheme of exploitative profiteering and self-dealing.”

The pricetag for force-placed insurance policies procured by HSBC for its borrowers can run as much as 10 times more than standard hazard insurance policies, the suit contends.

It also alleges that the London bank and its affiliates have a “pre-set arrangement” with Assurant, giving the insurance company access to its database of mortgagees so it can locate properties with potentially lapsed hazard policies. Assurant then automatically puts a policy in place and “writes to the homeowners to notify them,” according to the suit. The cost of the policy is “pre-determined,” the suit adds. “Further, the cost of the insurance of each home bears no relation to each homeowner’s individual home; rather, it is predetermined based upon HSBC’s entire portfolio of mortgages.”

“This arrangement insures that Assurant is the only entity providing insurance, with HSBC signing off and collecting kickback commissions, and the consumer providing the money,” the suit contends. “If the consumer cannot afford to pay the exorbitant premiums for force-placed insurance, the premiums are added to the mortgage’s principal balance.”

The suit also asserts that Assurant “pays millions of dollars in commissions each year to the loan servicers and lenders with whom it enters into kickback agreements,” including HSBC.

Nonexistent home insured

Blackburn, a resident of Semmes, Ala. whose home loan was owned and serviced by HSBC Finance Corp. got first-hand experience with force-placed policies after her home near Mobile burned to the ground two years ago, according to the suit. Prior to the fire, Blackburn had insured her home, its contents, and other structures on the property in excess of $600,000, according to the suit.

After the fire, and before Blackburn could rebuild, her insurer—after paying her fire claim—declined to issue a new policy because Blackburn had yet to rebuild and there was no longer a home on the land, according to the suit. That did not stop an HSBC affiliate that still held the mortgage from notifying her that it had secured a force-placed policy on the property.

Because there was no home to insure, Blackburn thought the notice was an error and contacted HSBC by phone and in writing and tried without success to correct the mistake, the suit said.

Six months later, in May 2012, Blackburn again received notice that her annual premium would be $2,896 and would be backdated to the previous March. But unlike her old policy, for which she had paid a similar premium, the new force-placed policy included barely half of the previous coverage, according to the suit, and insured a home that did not exist.

In May, HSBC’s affiliate notified Blackburn that her force-placed policy had expired and would be renewed if she did not provide evidence that she had a homeowners policy in place, although her home had not yet been rebuilt and other insurers had informed her there was nothing to insure, the suit contends. When Blackburn sent a letter once again explaining that her home had burned to the ground, had not been rebuilt and that there was no insurable home on the land, HSBC replied with a notice that it once again had purchased force-placed insurance on her non-existent home from Assurant, according to the suit.

The case is Blackburn v. HSBC Finance Corp., No. .1:13-cv-03714(N.D. Ga.).