On November 4, 2013, the Seventh Circuit affirmed the dismissal of a putative class action claiming that a lender and insurance company violated several state laws by allegedly paying and accepting "kickbacks" in connection with the purchase of lender-placed insurance. In so doing, the Seventh Circuit declined to analyze, as the district court had, whether plaintiff's claims were preempted by federal law or barred by the filed-rate doctrine, and instead concluded that plaintiff's allegations simply did not state viable causes of action under any of the state law claims she pled.
The plaintiff in Cohen v. American Security Insurance Company took out a mortgage loan from a lender that later merged into Wachovia Mortgage to purchase a townhouse. The loan agreement required plaintiff to maintain acceptable property insurance on the home and authorized plaintiff's lender to purchase insurance on the property if plaintiff failed to do so. At closing, plaintiff signed an additional notice that also set forth plaintiff's obligation to purchase property insurance and her lender's right to purchase such insurance if plaintiff did not.
Plaintiff initially purchased property insurance but allowed her policy to lapse. Wachovia notified plaintiff that if she did not obtain insurance, it would do so and charge her for it. Plaintiff never obtained the required insurance, and, therefore, Wachovia purchased from American Security Insurance Company (ASI) a hazard insurance policy, backdated to the date on which plaintiff's insurance policy lapsed, to cover plaintiff's townhouse. Wachovia notified plaintiff of the cost of this insurance and indicated that such replacement insurance could be cancelled at any time if plaintiff provided proof that she had obtained the required insurance.
Plaintiff then filed a putative class action, alleging that the conduct of defendants was deceptive because defendants did not disclose that Wachovia was receiving what plaintiff described as "kickbacks" from ASI. The alleged "kickbacks" were commissions ASI paid to an insurance agent affiliate of Wachovia. Plaintiff set forth claims under the Illinois Consumer Fraud and Deceptive Business Practices Act, and claims for breach of contract, fraud, conversion, and unjust enrichment. The district court dismissed all of the claims against Wachovia, holding that they were preempted by federal law, and dismissed most of the claims against ASI as barred by the filed-rate doctrine.
On appeal, the Seventh Circuit questioned the district court's reliance on the filed-rate doctrine because the Illinois Department of Insurance, unlike its counterparts in most other states, does not have the authority to approve or disapprove property insurance rates. Ultimately, however, the Court did not rely on the filed-rate doctrine or the law of preemption to affirm the dismissal of plaintiff's claims. Instead, the Court held that plaintiff failed to set forth any viable claims for relief.
The Seventh Circuit held that plaintiff could not set forth a plausible claim under the Illinois Consumer Fraud Act because Wachovia gave plaintiff consistent, clear warnings regarding her obligation to purchase insurance and Wachovia's right to purchase it for her if she failed to do so. The Court held that there was nothing wrongful or coercive about holding plaintiff to her contractual obligations, especially when plaintiff always had the right to avoid the higher cost of lender-placed insurance by purchasing her own insurance.
With respect to plaintiff's allegations that the commission paid by ASI to an affiliate of Wachovia constituted a kickback, the Seventh Circuit first noted that the defining characteristic of a kickback is divided loyalties. The Court then rejected plaintiff's contention that the commission was a kickback because Wachovia never acted on behalf of plaintiff and made clear all along that, in purchasing hazard insurance to cover the property collateralizing its mortgage loan, the bank only was acting to protect its own interests.
The Seventh Circuit also held that plaintiff could not set forth a plausible claim for breach of contract because nothing in the contract between plaintiff and Wachovia prohibited Wachovia and its insurance agency affiliate from receiving a fee or commission when lender-placed insurance became necessary or prohibited Wachovia from backdating the lender-placed insurance to the date the borrower's policy lapsed. In addition, plaintiff could not set forth a plausible claim for fraud because Wachovia had no duty to disclose the commissions. Finally, the Seventh Circuit held that plaintiff could not set forth plausible claims for conversion or unjust enrichment under Illinois law.
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