The U.S. Court of Appeals for the First Circuit has revived lawsuits brought by two homeowners against Bank of America Corp. for requiring them to buy flood insurance of greater value than their mortgage principal amount.
The First Circuit issued split rulings on September 21 in the two unrelated District of Massachusetts purported class actions: Lass v. Bank of America N.A. and Kolbe v. BAC Home Loans Servicing LP.
Both rulings vacated dismissals of the claims against Bank of America and affiliates ordered by Judge Nathaniel Gorton on August 2011. But in the Kolbe case, the appeals court affirmed the dismissal of claims against Balboa Insurance Co., a company that Bank of America worked with to place the disputed insurance policy.
Susan Lass claimed her $40,000 loan from Residential Mortgage Corp. in February 1994 required her to sign a flood insurance notification document requiring her to carry flood insurance equal to the lesser of her loan amount or the maximum available amount.
Bank of America bought her mortgage in November 2009 and required her to buy flood insurance equal to the lesser of the National Flood Insurance Program maximum, which was $250,000, or the replacement value of the property.
At the time, her principal balance was about $28,000 and she had a $100,000 flood insurance policy. She disputed the bank’s directive to buy an extra $145,086 in flood insurance. The bank purchased policies for her property starting in January 2010, which increased her monthly payments.
Lass sued Bank of America and BAC Home Loans Servicing LP in April 2011 for breach of contract, breach of the covenant of good faith and fair dealing, unjust enrichment, breach of fiduciary duty and violation of the Real Estate Settlement Procedures Act.
She also claimed the banks unlawfully profited from “force-placing” flood insurance because they charged too much and accepted kickbacks, commissions, or “other compensations.”
Stanley Kolbe borrowed $197,437 from Taylor Bean & Whitaker Mortgage Corp. in October 2008. In August 2009, Bank of America subsidiary BAC became the servicer of the mortgage. BAC and its agent, Balboa, demanded that Kolbe buy $46,000 in additional flood insurance coverage to match the amount of his homeowner’s insurance coverage.
Kolbe sued BAC and Balboa in February 2011 for breach of his mortgage contract and breach of the implied covenant of good faith and fair dealing.
He claimed his mortgage requires him to maintain the amount of flood insurance required by the secretary of Housing and Urban Development (HUD). That amount is the lesser of his loan balance or $250,000.
Judges Michael Boudin and O. Rogeriee Thompson and Senior Judge Kermit Lipez heard oral arguments in both cases on February 9.
Lipez wrote both opinions, joined by Thompson. Boudin penned a dissent in each case.
In the Lass case, Lipez wrote that the “Flood Insurance Notification” document that Lass received at her real estate closing “may be read to state that the mandatory amount of flood insurance imposed at that time would remain unchanged for the duration of the mortgage. Given the ambiguity as to the lender’s authority to increase the coverage requirement, Lass is entitled to proceed with her breach of contract and related claims.”
Lipez noted, “We are…unmoved by the Bank’s assertion that limiting flood insurance coverage to the amount required at Lass’s closing is unreasonable given that FEMA recommends insuring for the full replacement value of the property.”
He concluded, “the mortgage and the Notification are ambiguous as to the lender’s authority to demand increased flood coverage on Lass’s property. The district court therefore erred by rejecting Lass’s proposed construction of the mortgage as unreasonable, and her breach of contract claim must be reinstated.”
Boudin wrote in his dissent that the explicit language of the mortgage allowed the bank to require Lass to buy additional insurance beyond the unpaid balance of the loan. “Under the agreement, Lass had to maintain insurance against ‘loss by fire and any other hazards, including floods or flooding, for which Lender requires insurance,’ and this shall be “in the amounts and for the periods that the Lender requires,’” Boudin wrote. “It is hard to imagine how the obligation could be more clearly expressed.”
Boudin argued that the mortgage agreement unambiguously gives the bank “the right to require more flood insurance by empowering it to require insurance in the amount it specifies for ‘any hazards.’”
He concluded that “nothing in the loan agreement says that the bank’s authority to fix the amount of insurance for ‘any hazards’ excludes floods.”
Lipez also vacated the dismissal of Kolbe’s case: “Having closely examined the mortgage language at issue and the relevant context, we are persuaded that the mortgage is reasonably susceptible to an understanding that supports Kolbe’s breach of contract and implied covenant claims.”
Lass’ lawyer, Kai Richter, an associate at Minneapolis-based Nichols Kaster, said, “We think other courts will find the rulings very persuasive in light of the fact that this is coming from a circuit court and in light of the fact that it’s consistent with the decisions reached to date.”
That’s important to Nichols Kaster because it is litigating more than a dozen so-called force-placed flood insurance class actions against large U.S. banks. “The [First Circuit] opinions are a vindication of all our claims on all of our theories,” Richter said.
Richter said several firms are handling the cases separately but working cooperatively.
Edward Haber, a partner at Boston-based Shapiro Haber & Urmy who argued Kolbe’s case, said, “We believe that Bank of America has been requiring people to maintain far more flood insurance than they are required to under the terms of their mortgages. In light of this decision, we will be able to continue our effort to require Bank of America to cease that practice and compensate the tens of thousands of mortgagors for the excessive insurance premiums they have been forced to pay.”
John Englander, a partner at Boston-based Goodwin Procter, who argued both cases for Bank of America, referred questions to his client.
In an emailed statement, Bank of America spokeswoman Shirley Norton said that the First Circuit’s decisions are procedural rulings that allow the plaintiffs to continue their cases. “We are disappointed with the opinions and are evaluating our next steps in defending against the allegations,” Norton stated.
Sheri Qualters can be contacted at email@example.com.