United States: Insurance Filed Rate Defense Wins Over The Second Circuit

In a noteworthy embrace of the filed rate doctrine, the Second Circuit recently ruled, in the context of a challenge to so-called lender-placed or "force placed" insurance, that a regulator-approved rate is subject to the filed rate doctrine and is unassailable, even when that rate is passed through an intermediary and even when there is no direct challenge to the rate itself. Rothstein v. Balboa Ins. Co., No. 14-2250-CV, 2015 WL 4460713 (2d Cir. July 22, 2015). Addressing conflicting district court law—and specifically reversing a ruling of the United States District Court for the Southern District of New York—the Second Circuit's ruling is unequivocal and gives a strong boost to a doctrine that has come under scrutiny in the trial courts for some time.

Writing for a unanimous three-judge panel, Circuit Judge Dennis Jacobs stated, "We hold that a claim challenging a regulator-approved rate is subject to the filed rate doctrine whether or not the rate is passed through an intermediary," and is therefore "barred if it would undermine the regulator's rate-setting authority or operate to give the suing ratepayer a preferential rate."  Plainly, the panel said, the plaintiffs' claims in the case before it invite "judicial meddling" into issues of insurance policy and would undermine the rate-making authority of the state insurance regulators who approved the rates at issue.  Regulators have the final say as to what should or shouldn't be included in a rate, and thus the Court reasoned that "whether insurer-provided services should have been reflected in the calculation of [lender-placed insurance] is not for us to say."  The Court further ruled that allowing the claims to proceed "would result in Plaintiffs paying preferential rates for [lender-placed insurance]," which itself was an independently sufficient basis to apply the filed rate doctrine and dismiss the action.

In the case before the Court, defendants Balboa Insurance Company, MeritPlan Insurance Company (together, "Balboa"), and Newport Management Corporation (Newport) had been sued by plaintiff mortgagors of residential properties in various states who claimed that they were overcharged by their loan servicer for lender-placed insurance (LPI) issued by the defendants.  As background, in a typical mortgage loan arrangement, if the mortgagor fails to maintain adequate hazard insurance, the lender can purchase insurance on the mortgagor's behalf and then seek reimbursement from the mortgagor.  The plaintiffs here failed to maintain hazard insurance on their properties as required by the terms of their loan agreements.  Consequently, their loan servicer, GMAC Mortgage LLC (GMAC), bought the LPI from Balboa at rates that were approved by state insurance regulators, and then sought reimbursement from the plaintiffs at those same rates.

The plaintiffs challenged these arrangements under the Racketeer Influenced and Corrupt Organizations Act (RICO) and the Real Estate Settlement Procedures Act (RESPA), claiming that GMAC fraudulently overbilled them for the LPI because the insurance rates they were ultimately charged did not reflect an alleged discount that GMAC received from Balboa through Balboa's affiliate, Newport—an arrangement that the plaintiffs called a "kickback scheme."  According to the plaintiffs, because GMAC still billed the plaintiffs at the filed rates, it unlawfully retained for itself the entire benefit of that discount.  The plaintiffs originally sued GMAC and various affiliates, along with Balboa and Newport, although the claims against all defendants except Balboa and Newport had been settled by the time of appeal.

Defendants moved to dismiss the plaintiffs' claims, raising, among other things, the filed rate doctrine.  Defendants argued that the plaintiffs could not bring a lawsuit that, while framed as RICO and RESPA allegations, amounted to a challenge to LPI rates that had expressly been submitted to and approved by insurance regulators in the relevant states.  The district court denied the motion in relevant part, reasoning that although Balboa received regulatory approval for the rates it charged to GMAC, that approval did not necessarily extend to the mortgagors' reimbursement to GMAC.  That court concluded that the filed rate doctrine did not apply because it passed through an intermediary—the plaintiffs were not direct customers of the rate filer. 

In so holding, however, the district court noted a conflict of authority on this issue.  The United States District Court for the Southern District of Illinois, for example, also addressing allegations of kickbacks relative to force placed insurance, noted that "recently, some courts have begun to view cases such as the one before the Court, not so much as a challenge to the legal rates charged, but rather as a challenge to the manner in which the defendants select the insurers, the manipulation of the force-place insurance policy process, and the impermissible kickbacks included in the premiums."  Simpkins v. Wells Fargo Bank, N.A, No. 12 Civ. 0768, 2013 WL 4510166, at *14 (S.D.Ill. Aug. 26, 2013).  The Simpkins court concluded that payments made to the lender "pursuant to ... side agreements are not subject to the regulatory scheme in the same way that insurance rates are," and that, as a result, the plaintiffs were not "barred under the filed rate doctrine from challenging conduct which [was] not otherwise addressed by a governing regulatory agency."  Id.  The Southern District of Georgia, on the other hand, recently found "dubious" the distinction between challenges to "the method of choosing an insurer" versus challenges to the filed rates themselves, particularly because calculating damages in cases like the one before it would require the Court to impermissibly make "a judicial determination of the reasonableness of the rate."  Roberts v. Wells Fargo Bank, N.A., No. 12 Civ. 200, 2013 WL 1233268, at *13 (S.D.Ga. Mar. 27, 2013). 

In light of this conflicting authority, the district court in Balboa certified its decision denying the Balboa defendants' motion to dismiss for immediate interlocutory appeal.

On appeal, the Second Circuit criticized the district court for its simplistic determination that the filed rate doctrine addresses only a simple A–to–B transaction, in which insurer A charged an approved rate to B, and not the A–to–B–to–C transaction at issue here, in which the insurer billed the lender and the lender in turn billed the borrower.  In no uncertain terms, the Second Circuit held that the doctrine operates notwithstanding an intermediary that passes along the rate.

The Court's reasoning turned upon its view of the core principles supporting the filed rate doctrine: The principle of nonjusticiability—i.e., that courts should not undermine agency rate-making authority by upsetting approved rates—and the principle of nondiscrimination—i.e., that litigation should not become a means for certain ratepayers to obtain preferential rates.  These doctrines, the Court held, are of equal force in an A–to–B–to–C transaction.  Furthermore, where the rate-regulated product necessarily passes through intermediaries before the rate is paid by the ultimate consumer, as it does in many industries (such as the energy industry as well as the LPI industry), it would make little sense for the filed rate doctrine to apply as between the rate filer and the intermediaries, but not apply when it comes to the ultimate ratepayers.  Indeed, the distinction between an A–to–B transaction and an A–to–B–to–C transaction is "especially immaterial" in the LPI context because the lender in that context acts in the borrower's place to force place a transaction that the borrower should have entered in the first instance.

The Second Circuit then analyzed the Balboa plaintiffs' claims pursuant to the nonjusticiability and nondiscrimination principles, and found that both principles barred the claims. 

Because the nonjusticiability principle precludes any judicial action that undermines agency rate-making authority, a claim may be barred even if it can be characterized as challenging something other than the rate itself.  The Court parsed the theory behind the claims here, finding that they amounted to claims that the plaintiffs were overbilled when they were charged the approved LPI rates, instead of lower rates net of the value of loan tracking services provided to GMAC by Newport.  The Court found no merit in the plaintiffs' assertion that they were attacking the "fraudulent scheme" and not the rates themselves.  The plaintiffs' theory rested on the premise that the rates approved by regulators were too high, and can succeed only if the arrangement with Newport should have been treated as part and parcel of the LPI transaction and reflected in reduced LPI rates.  But the question of what should or should not be included in a filed rate is reserved exclusively to the regulators.

Likewise, the nondiscrimination principle precludes individual ratepayers from undermining uniform rate application—which the court found is not cured simply because the plaintiffs brought their claims on behalf of a putative class.  Any claim that gives certain ratepayers a preference is barred.  Accordingly, the court found that the plaintiffs' claims could not move forward because any remedy would result in the plaintiffs paying preferential rates for LPI.

The Second Circuit's decision underscores the applicability of the filed rate doctrine irrespective of the chain through which the rates are passed.  It further removes from the courts' domain challenges which facially attack allegedly fraudulent schemes involving insurance charges, focusing courts on the effect such challenges, if successful, would have on the authority of the rate-makers and on rates themselves.  This decision will reach both the insurance and energy industries, where rates are commonly passed through intermediaries, and should refocus judicial inquiry where challenges are made to the charge of rates to ultimate ratepayers. 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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