Case 0:12-cv JIC Document 36 Entered on FLSD Docket 03/04/2013 Page 1 of 40 UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF FLORIDA

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1 Case 0:12-cv JIC Document 36 Entered on FLSD Docket 03/04/2013 Page 1 of 40 UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF FLORIDA Case No. 0: Civ-Cohn/Seltzer PHILIP PULLEY, DEVRA PULLEY, JEROME DAVIS, and SUSAN DAVIS, on behalf of themselves and all others similarly situated, v. Plaintiff JPMORGAN CHASE BANK, N.A., CHASE BANK USA, N.A., CHASE INSURANCE AGENCY, JP MORGAN INSURANCE AGENCY, ASSURANT, INC., AMERICAN SECURITY INSURANCE COMPANY and VOYAGER INDEMNITY INSURANCE COMPANY Defendants ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) JURY TRIAL DEMANDED SECOND AMENDED CLASS ACTION COMPLAINT 1. Plaintiffs Philip and Devra Pulley, and Jerome and Susan Davis (together referred to as "Plaintiffs") on behalf of themselves and all other similarly situated property owners who have or had residential mortgage loans and/or lines of credit originated and/or serviced by Defendants JPMorgan Chase Bank, N.A. ("JPMorgan"), Chase Bank USA, N.A. ("Chase Bank") and/or non-defendant Chase Home Finance, LLC 1 ("Chase Home Finance") between May 16, 1 Chase Home Finance, previously a wholly-owned subsidiary of Defendant JPMorgan has served as the primary servicing unit for loans originated and/or acquired by affiliates of ultimate parent JPMorgan Chase & Co. Upon information and belief, on or about May 1, 2011, Chase Home Finance was merged with and into Defendant JPMorgan, with Defendant JPMorgan as the surviving entity. Accordingly, as described herein, Defendant JPMorgan is named as a defendant in this action both in its own capacity and as successor-in-interest to Chase Home Finance. 1

2 Case 0:12-cv JIC Document 36 Entered on FLSD Docket 03/04/2013 Page 2 of and the present (the Class Period") and, in connection therewith, were required to pay premiums for force-placed" wind insurance policies. 2. As a condition of entering into mortgages, lenders typically require borrowers to carry insurance naming the lender as an additional insured in the event of hazard or loss. Basic homeowners insurance policies may exclude from coverage certain hazards such as wind or flood. Thus, lenders may require the borrower to carry separate insurance policies on the excluded hazards. If homeowners fail to carry supplemental coverage for excluded risks or if homeowners supplemental coverage is terminated, the lender may step in and purchase coverage and pass the cost on to the homeowner. These policies are commonly called forceplaced or lender-placed policies. 3. In certain geographic areas in the U.S., hazard or risk insurance policies commonly exclude wind (sometimes referred to as windstorm or wind/hail) coverage. In those areas, lenders may require borrowers to maintain a separate wind insurance policy. While wind coverage is often excluded in areas that have been or may be impacted by hurricanes, there are also other areas in which lenders may require borrowers to maintain a separate wind insurance policy. 4. "Force-placed" or lender-placed insurance policies provide less coverage and are substantially more costly than the borrowers' original policies, and at the same time provide lucrative financial benefits to defendants and/or their affiliates. Further, such policies often provide unnecessary or duplicative coverage, in that they are improperly backdated to collect premiums for time periods during which there is absolutely no risk of loss. 5. As the American Banker observed: 2

3 Case 0:12-cv JIC Document 36 Entered on FLSD Docket 03/04/2013 Page 3 of 40 When banks buy insurance on the homes of borrowers whose policies have lapsed, they get a great deal. Just not for the homeowners and investors who have to pay for it. Nominally purchased to protect the owners of mortgage-backed securities, such "force-placed" insurance can be 10 times as costly as regular policies, raising struggling homeowners' debt loads, pushing them toward foreclosure and worsening the loss to investors on each defaulted loan. Evidence of abuses and self-dealing in the force-placed insurance industry suggests that there may be far larger problems in how servicers are handling distressed loans than the sloppy document recording that has been the recent focus of industry woes. Behind banks' servicing insurance practices lie conflicts of interest that align servicers and their insurer partners against borrowers and investors. Bank of America Corp. owns a force-placed insurance subsidiary, and most other major servicers receive commissions or reinsurance fees on the very same policies they purchase on investors' and borrowers' behalf. See Jeff Horwitz, Ties to Insurers Could Land Mortgage Servicers in More Trouble, American Banker (Nov. 9, 2010)(hereinafter Ties to Insurers ), available at: 6. Throughout the Class Period, Defendants have engaged in unlawful, abusive and unfair practices with respect to force-placed insurance, including, among others and as described in further detail below: (a) receiving fees, payments, commissions, and/or other things of value from providers of force-placed insurance; (b) providing force-placed insurance at an improperly high cost to the borrower; and (c) forcing borrowers to pay for unnecessary insurance. 7. Defendants' unlawful actions include, inter alia, purchasing over-priced insurance policies, having pre-arranged agreements to purchase force-placed insurance from a single company in which they have a financial interest, backdating the force-placed policies to charge 3

4 Case 0:12-cv JIC Document 36 Entered on FLSD Docket 03/04/2013 Page 4 of 40 for retroactive coverage, double charging for certain periods of coverage, over-insuring property and receiving "commissions," "kickbacks" and percentages of premiums on the force-placed policies. These actions constitute a pattern of exploitative profiteering and self-dealing against the interest of Plaintiffs and the absent Class members. 8. Defendants Assurant Inc., American Security Insurance Company ( ASIC ) and Voyager Indemnity Insurance Company ( Voyager ) (together referred to as Assurant ), 2 unlawful actions also include, inter alia, aiding and abetting Chase s breach of contract and Chase Insurance Agency and JP Morgan Insurance Agency s breach of fiduciary duty through the promotion, participation and facilitation of a scheme pursuant to which Assurant sold overpriced unnecessary, and duplicative force-placed wind insurance coverage to Plaintiffs and the Class, in order to maximize Defendants profits to the detriment of borrowers. 9. Upon information and belief, JPMorgan, Chase Bank, Chase Insurance Agency and/or JP Morgan Insurance Agency (together referred to as Chase ) has entered into agreements with Assurant and/or other affiliates and subsidiaries of Assurant, Inc., pursuant to which Chase, and/or its subsidiaries/affiliates: (a) receive a portion of the premiums for each force-placed insurance policy purchased for a borrower without any real or commensurate transfer of risk. Moreover, upon information and belief, those arrangements are exclusive. See Assurant Form 10-K for the year ending December 31, 2011, filed on February 23, 2012, at 4 ( Assurant Specialty Property establishes long-term relationships with leading mortgage lenders and servicers. The majority of our lender-placed agreements are exclusive. Typically these agreements have terms of three to five years and allow us to integrate our systems with those of our clients. ). 2 The term Defendants refers to the Chase and Assurant, collectively. 4

5 Case 0:12-cv JIC Document 36 Entered on FLSD Docket 03/04/2013 Page 5 of At issue in this case, is whether defendants manipulated the force-place insurance process by unfair, improper and/or fraudulent practices so as to obtain excessive premiums, commissions and kickbacks and whether by doing so, Defendants have violated their duties to the Plaintiffs and the Class. Plaintiffs and the Class seek damages for the harm caused by Defendants' unlawful conduct, as well as restitution for Defendants' unjust enrichment. JURISDICTION AND VENUE 11. This Court has subject matter jurisdiction over this action pursuant to 28 U.S.C and This Court has personal jurisdiction over defendants because defendants are licensed to do business in Florida or otherwise conduct business in Florida. 13. This Court also has original diversity jurisdiction pursuant to the Class Action Fairness Act, 28 U.S.C. 1332(d)(2) ("CAFA"). Plaintiffs Pulley are citizens of the Commonwealth of Pennsylvania and own a home in the State of Florida. The Davis Plaintiffs are citizens of Connecticut and also own a home in Florida. Defendants are citizens of different states. The amount in controversy in this action exceeds $5,000,000, and there are more than 100 members the classes. 14. In addition, this Court has diversity jurisdiction over Plaintiffs state law claims pursuant to 28 U.S.C. 1332(a). The matter in controversy is greater than $75,000 and this matter is between citizens of different states. This Court also has supplemental jurisdiction over Plaintiffs' state law claims pursuant to 28 U.S.C Venue is proper in this district under 28 U.S.C. 1391(b) because the real properties involved in Plaintiffs mortgage loan transactions are located in this district, 5

6 Case 0:12-cv JIC Document 36 Entered on FLSD Docket 03/04/2013 Page 6 of 40 Defendants regularly conduct business in this district, and/or a substantial part of the events giving rise to the claims occurred in this district. PARTIES 16. Plaintiffs Philip and Devra Pulley (the Pulleys ) own a residence in Lighthouse Point, Florida. On or about March 23, 2005, the Pulleys entered into a mortgage loan agreement with Washington Mutual Bank, F.A., secured by their residence in Lighthouse Point, Florida ( Pulley Mortgage ). See Pulley Mortgage, attached as Exhibit During September 2008, JPMorgan acquired the Pulley s mortgage from Washington Mutual Bank F.A. 18. The Pulleys continually maintained a Citizens Wind Policy from 2005 until September 2010, never paying more than $9, for their annual premium. The policy provided $1,200, of coverage on the structure and $600,000 on the contents. See Citizens Wind Policy, attached as Exhibit 2. In 2010 Citizens declined to continue the Pulleys Citizens Wind Policy, unless they made certain improvements to the property and satisfied Citizens inspections of the property. After receipt of this notice, the Pulley s made numerous improvements to their property in an effort to meet Citizens requirements. Citizens conducted numerous inspections of the property until February 2011, when it deemed the Pulleys renovations sufficient to meet its requirements and reinstated their Citizens Wind Policy. 19. On October 15, 2010, while they were making the improvements necessary to reinstate their Citizens Wind Policy, Chase Home Finance notified the Pulley s that under the terms of their mortgage agreement, the Pulleys were required to have wind insurance and if it did not receive confirmation of the existence of an adequate wind policy, it would force-place a policy in 30 days. See October 15, 2010 letter to Phillip and Devra Pulley attached as Exhibit 3. In that letter, Chase Home Finance insisted that [a]ccording to the terms of your mortgage, you 6

7 Case 0:12-cv JIC Document 36 Entered on FLSD Docket 03/04/2013 Page 7 of 40 are required to maintain continuous wind and hail insurance (hereafter, wind insurance ) in the same coverage amount of your current homeowner s insurance on your property. This statement is false. There is no provision in the mortgage contract requiring wind coverage in the same coverage amount of your current homeowner s insurance on your property. 20. The October 15, 2010 letter from Chase further states that: If we obtain wind insurance for you, the cost is likely to be much higher than insurance you obtain on your own. This is because the wind insurance we purchase is issued automatically without evaluating the risk characteristics of the property. The premium for this insurance coverage will be $61, The wind insurance we obtain is limited and is primarily for the benefit of the person or company who presently owns your mortgage loan. If you incur property damage or loss, you may not have adequate coverage for any damages that you suffer because the person or company that owns your loan will be paid first. If Chase purchases wind insurance for you, an affiliate of Chase will receive an economic benefit. (emphasis added). 21. In November 2010, the Pulleys received a Notice of Purchase of Wind Insurance with a copy of a Residential Windstorm Policy from Voyager ( Voyager Wind Policy ). See November 25, 2010 letter from Chase Home Finance to Philip and Devra Pulley attached as Exhibit 4. Chase Home Finance force-placed a one year wind hazard policy from Voyager with an annual premium of $61,629.75, which provided $1,638, of coverage on only the structure. 3 The premium for the Voyager Wind Policy was over 6 times the premium of the Pulleys Citizens Wind Policy. In addition, the Voyager Wind Policy was backdated to September 12, 2010, despite the fact that there was no damage to the property or claims arising out of the property for period of the alleged lapse in coverage. 3 At the time the principal balance of the mortgage on the Pulleys home was $1,458,

8 Case 0:12-cv JIC Document 36 Entered on FLSD Docket 03/04/2013 Page 8 of Chase Home Finance then added the $61, annual premium to the Pulley s escrow account which added $5, to their monthly mortgage payment. See Annual Escrow Account Statement dated January 18, 2011 attached as Exhibit On February 4, 2011, the Pulleys received and notified Chase Home Finance of their new Citizens Wind Policy with a total annual premium of $10, 727 and substantially more coverage than the Voyager Wind Policy. See Citizens Wind Policy attached as Exhibit 6. Chase was provided with a copy of this policy. Chase Home Finance was notified of the coverage, and on February 8, 2011 cancelled the Voyager Wind Policy and charged Plaintiffs $24, for the period from September 12, 2010 until the date of cancellation, even though the policy had not been placed on the property until November 25, Plaintiffs, Jerome and Susan Davis ( Davis or the Davis ) own a residence in Palm Beach Gardens, Florida. On or about July 11, 2003, the Davis entered into a mortgage loan agreement with Washington Mutual Bank, FA (which was later acquired by Chase), secured by the residence in Palm Beach Gardens, Florida. See Davis Mortgage attached as Exhibit The Davis purchased insurance coverage for the period April 27, 2012 to April 27, 2013, but the insurance coverage purchased contained an exclusion for windstorm coverage and, through an oversight by their insurance agent, separate wind coverage was not obtained. On July 6, 2012, Defendants wrote to the Davis regarding the force-placement of a wind insurance policy, stating: The cost of the wind insurance we purchase is likely to be significantly higher than insurance you can purchase on your own. This is because the wind insurance we purchase is issued automatically without evaluating the risk of insuring your property. 26. On August 14, 2012, Chase notified the Davis that it had force-placed wind insurance through Voyager Indemnity for an annual premium of $46, and backdated the 8

9 Case 0:12-cv JIC Document 36 Entered on FLSD Docket 03/04/2013 Page 9 of 40 coverage to May 7, See August 14, 2012 letter from Chase Home Finance to Jerome and Susan Davis attached as Exhibit 8. The Davis were never notified at any point prior to the July 6, 2012 letter from Defendants, that they were required to maintain any type of windstorm insurance on their residence. 27. On August 15 th 2012, the Davis purchased wind insurance from People s Trust Insurance Co. for an annual premium of $10,754. Chase was notified of the coverage, and thereafter cancelled the Voyager Policy. However, Chase charged the Davis $12,678 for the period of May 7, 2012 to August 15, 2012, even though the policy was placed on August 9, days earlier. See December 13, 2012 letter from Chase Home Finance to Jerome and Susan Davis attached as Exhibit 9. Chase backdated the force-placed insurance policy to cover the period from May 7, 2012 to August 9, 2012, even though there was no risk of loss and thus no need to protect the lender s financial interest in the property for the period from May 7, 2012 to August 9, 2012 as this period had already passed. DEFENDANTS 28. Defendant JPMorgan, a subsidiary of JPMorgan Chase & Co., is a national banking association that conducts business in Florida and other states throughout the United States. Non-party Chase Home Finance, LLC ("Chase Home Finance") is a Delaware limited liability company that, during the relevant time period, served as the primary servicing unit for loans originated and/or acquired by affiliates of ultimate parent JPMorgan Chase & Co. These also include loans serviced by Washington Mutual and EMC Mortgages Corporation which were acquired by Chase in Chase Home Finance was merged with and into Defendant JPMorgan, with Defendant JPMorgan as the surviving entity. Accordingly, Defendant JPMorgan 9

10 Case 0:12-cv JIC Document 36 Entered on FLSD Docket 03/04/2013 Page 10 of 40 is named as a defendant in this action both in its own capacity and as successor-in-interest to Chase Home Finance. 29. Defendant Chase Bank, a subsidiary of JPMorgan Chase & Co., is a national banking association that conducts business in California and other states throughout the United States. 30. In all of its actions described herein, Chase Home Finance acted on its own behalf and as the duly authorized agent of Defendants JPMorgan and Chase Bank or other owners of the underlying notes and mortgage agreements. Defendants were contractually obligated to service the loans at issue pursuant to the terms of the mortgage contracts. 31. Defendant, Chase Insurance Agency Inc. ( CIA ) is a Wisconsin corporation headquartered in Milwaukee, Wisconsin. CIA does business in Florida and throughout the United States. CIA is a wholly owned subsidiary of Defendant JPMorgan and has purported to act as insurance agent on Chase s force placement of Wind Insurance. 32. Defendant JP Morgan Insurance Agency Inc. ( JP Morgan Insurance ) was formerly a Delaware corporation with its headquarters in Chicago, Illinios. In 2009, JP Morgan Insurance merged into CIA with CIA as the surviving entity. JP Morgan Insurance also purported to act as insurance agent on the force placement of Wind Insurance Defendant Assurant Inc. is a Delaware corporation with its headquarters in New York, New York. Assurant, Inc. is a provider of specialized insurance products and related services in Florida and throughout the United States. Upon information and belief, Assurant Inc. provides force placed insurance related services through its operating segment Assurant Specialty Property. 4 CIA and JP Morgan Insurance are referred to as Chase Insurance Agency Defendants 10

11 Case 0:12-cv JIC Document 36 Entered on FLSD Docket 03/04/2013 Page 11 of Defendant American Security Insurance Company is a Delaware corporation with its principal place of business in Atlanta, Georgia and is a subsidiary of Assurant, Inc. that does business throughout the United States. Upon information and belief, ASIC provides services to Chase to track borrower compliance with insurance obligations and to place lender-placed insurance for Chase pursuant to a Master Services Agreement. The premium for Plaintiff's force-placed insurance policy was paid to American Security Insurance Company. 35. Defendant Voyager Indemnity Insurance Company ( Voyager ), which is a wholly owned subsidiary of Assurant, Inc. is a Georgia corporation with its headquarters in Atlanta, Georgia. Voyager issues force-placed surplus lines wind insurance policies for residential properties that are subject to JPMorgan and/or Chase Bank mortgages or lines of credit. 36. Assurant s unlawful actions include, inter alia, aiding and abetting Chase s breach of contract and the CIA and JPMorgan Insurance s breach of fiduciary duty through the promotion and participation in a scheme pursuant to which Assurant sold unconscionably overpriced, unnecessary, and duplicative force-placed insurance coverage pursuant to pre-arranged agreements facilitated through unlawful charges and the improper utilization of access to escrow funds in order to maximize Defendants profits to the detriment of borrowers. On information and belief Assurant, acting through its wholly owned subsidiaries, is the exclusive insurance carrier for all hazard policies, including wind policies, force-placed on mortgaged property that is serviced by the Chase. FACTUAL ALLEGATIONS 37. Defendants JPMorgan and Chase Bank originate mortgage loans and acquire loans from other lenders. Each such loan is secured by a deed of trust on the underlying property. 11

12 Case 0:12-cv JIC Document 36 Entered on FLSD Docket 03/04/2013 Page 12 of 40 Prior to its merger into Defendant JPMorgan, Chase Home Finance acted as the servicer of these loans. 38. Upon information and belief, Defendants have a significant financial stake in Voyager, a company that issues force-placed windstorm insurance policies for Defendants. Specifically, Voyager is a wholly-owned subsidiary of Assurant, Inc. ("Assurant"). See Assurant, Inc., Annual Report (Form 10-K), Exhibit 21 (February 23, 2011). As of January 19, 2010, JPMorgan Chase & Co. (the parent company of each of the Defendants) held 3,829,722 shares in Assurant through JPMorgan and other affiliates. See JPMorgan Chase& Co., Statement of Acquisition of Beneficial Ownership (Schedule 13G/ A) (January 19, 2010). 39. In order to protect the mortgagee's interest in the secured property, mortgage loan contracts typically allow the lender or third party servicer to "force-place insurance when the homeowner fails to maintain hazard insurance. This discretion afforded Defendants to force place insurance is contractually limited by the bounds of reasonable conduct. Defendants routinely exceed the bounds of reasonableness through the wrongful conduct described herein with respect to the forced placement of insurance. 40. These lender-placed or "force-placed" insurance policies are always more expensive than market-driven insurance coverage. Such policies can cost as much as ten times more than competitively priced policies. While the force-placed insurance policy is for the benefit of the lender, the entire cost is passed on to the borrower. Despite the cost, because most forced placed insurance policies do not insure the contents of the property, the borrower could sustain a substantial loss if the home is damaged or destroyed. 41. The mortgage contracts do not disclose, that Chase will receive commissions, lump sum payments, and free or reduced fee services from force-placed insurance providers for 12

13 Case 0:12-cv JIC Document 36 Entered on FLSD Docket 03/04/2013 Page 13 of 40 placing the insurance with them. The mortgage contracts also do not disclose that the commission payments to Chase will be based upon percentages applied to the cost of the insurance premium of the force-placed insurance and that the greater the cost to the borrower the greater the payments to Chase. Defendants Receive Kickbacks in Violation of Their Duties to Borrowers 42. The force-placing of insurance policies is a very lucrative business for servicers. Mortgage servicers, including Defendants, routinely receive kickbacks and commissions from insurance companies for placing borrowers into force-placed insurance. The mortgage servicer benefits by placing the policy either: (a) with an affiliate or (b) with a third party provider who has already agreed to share revenue with the servicer in the form of lump sum payments direct commission payments, and free or discounted services such as tracking and administration. 43. Under the commission arrangement, the provider of the force-placed insurance policy pays a commission either directly to the servicer or to a subsidiary posing as an insurance "agent." Typically, under such an arrangement, commissions are paid to a "licensed insurance agency," such as Defendant CIA, which is an insurance agency that does little or nothing to earn its commission on force-placed insurance. 44. Under the services scheme, the insurance provider performs many of the services that are required of the servicing Defendant and does them for free or at reduced rates, thus saving the servicer significant costs. 13

14 Case 0:12-cv JIC Document 36 Entered on FLSD Docket 03/04/2013 Page 14 of Illustrative of the arrangements is the following graphic from American Banker 46. Borrowers have no opportunity to comparison-shop for force-placed insurance policies. The terms and conditions of the insurance policy, as well as the cost of the policy, are determined by the servicer and the insurer, rather than negotiated between the borrower and the insurer. 47. For their part, servicers have no incentive to seek the best rate. Rather, servicers are financially motivated to force borrowers to the insurer that will provide the greatest financial benefit to the servicer. 14

15 Case 0:12-cv JIC Document 36 Entered on FLSD Docket 03/04/2013 Page 15 of Servicers commonly attempt to justify the high price of force-placed insurance policies by pointing to the higher risk associated with the lack of individual policy underwriting. However, as American Banker noted: See Ties to Insurers, supra. Though part of the extra expense can be explained by the higher risks associated with insuring the homes of delinquent borrowers, force-placed policies generate profit margins unheard of elsewhere in the insurance industry even after accounting for the generous commissions and other payments that servicers demand. 49. Servicers also attempt to blame the exorbitant cost of force-placed insurance on the fact that the policy is issued without the benefit of a prior inspection of the property. However, according to the National Consumer Law Center, as a general matter, insurers do not routinely inspect residential properties in the course of underwriting when the policy is not forceplaced, either. See id. 50. As Birny Birnbaum of the Center for Economic Justice testified, servicer explanations for the high cost of force-placed insurance are unsupported by any evidence. Loss ratios have been historically low. See Binbaum NYDFS Testimony. 51. Commonly, a mortgage loan servicer enters into an agreement with a provider, pursuant to which it refers borrowers exclusively to the provider for force-placed insurance. For example, in its 2011 Annual Report and Form 10-K, Assurant, the nation's largest provider of force-placed insurance policies and the parent of Voyager Indemnity, states that it establishes "long-term relationships" with leading lenders and servicers and that the majority of its lenderplaced agreements are exclusive. ("The majority of our lender-placed agreements are exclusive."). Defendants have maintained an exclusive arrangement with Assurant since at least

16 Case 0:12-cv JIC Document 36 Entered on FLSD Docket 03/04/2013 Page 16 of Upon information and belief, Chase is party to an agreement with ASIC pursuant to which it receives payments for the referral of business through one or more of the arrangements described above, including through commissions paid to CIA. 53. Force-placed insurance policies are not underwritten on an individual policy basis. Rather, upon information and belief, servicers' contracts with force-placed insurance providers require or at least permit the insurer automatically to issue these policies when a borrower's insurance coverage is not maintained. 54. As J. Robert Hunter in his recent testimony before the NYDFS argued, lack of underwriting should also result in much lower acquisition expenses for FPI insurers, since no sales force is required to place the insurance. See Hunter NYFSD Testimony. Servicers, including Chase, often go so far as to actually outsource their insurance processing to the forceplaced insurance provider. Thus, for example, Assurant or its subsidiaries continuously monitor Chase's mortgage portfolio and verify the existence of insurance on each mortgaged property. In the event that borrowers do not maintain adequate insurance coverage, the insurer sends notices on behalf of Defendants, and if coverage is not obtained, issues an insurance certificate on the property on behalf of and for the benefit of Chase. Upon information and belief, the services provided by Assurant are a form of kickback because they are provided for free or at reduced rates. Borrowers are Forced to Purchase and Maintain Hazard Insurance for Their Property That is Unnecessary, Duplicative and/or in Amounts Greater than Required by Law or Their Mortgage Agreements. 55. Motivated by the lucrative financial incentive associated with force-placing insurance, upon information and belief, Defendants have commonly required borrowers to pay for unnecessary insurance coverage. Such examples include, without limitation, requiring 16

17 Case 0:12-cv JIC Document 36 Entered on FLSD Docket 03/04/2013 Page 17 of 40 borrowers to pay for insurance coverage that exceeds the amount necessary to protect the mortgagee's interest in the secured property, double charging for the period between placement of coverage by the borrower and acceptance of that coverage by Defendants, and backdating force-placed insurance policies. Such practices require borrowers to pay for duplicative or retroactive coverage when no risk of loss exists. 56. Consumers should not be charged for backdated force-placed wind insurance. The National Associate of Insurance Commissioners ( NAIC ) has indicated that insurance is Prospective in nature. Requiring borrowers to pay for backdated insurance coverage to cover time periods during which there is no risk of loss is improper. See, e.g., Ties to Insurers, supra (quoting the NAIC as stating that insurance policies should not be back-dated to collect premiums for a time period that has already passed ). 57. In addition, many hazard insurance policies contain a Lender's Loss Payable Endorsement. This endorsement typically protects the lender for a period of at least ten days after the termination of the insurance policy. Accordingly, force-placing insurance policies effective immediately following the termination of the borrower's policy and charging borrowers expensive premiums for such insurance is unlawful and unfair because borrowers are charged for needless and duplicative insurance coverage. GOVERNMENT RESPONSE 58. Force-placed insurance practices of mortgage lenders and servicers, insurance providers and insurance producers are currently the subject of a number of government investigations prompted by concerns that consumers are being gouged when they are forceplaced in insurance following a lapse in their policies. See Under Interrogation, supra; Gretchen Morgenson, Hazard Insurance With Its Own Perils, supra; see also Louise Story, Big Banks Face Inquiry Over Home Insurance, New York Times (Jan. 10, 2012). 17

18 Case 0:12-cv JIC Document 36 Entered on FLSD Docket 03/04/2013 Page 18 of Thus, state attorneys general are cognizant of and have taken action concerning servicers abusive practices concerning force-placed insurance. Recently, a coalition of fortynine (49) state attorneys general entered into an historic joint state-federal settlement agreement with the country s five largest loan servicers, including JPMorgan ( National Mortgage Settlement ) to address numerous problems that have surfaced during the foreclosure crisis. See See National Mortgage Settlement Website, (official website established by the government relating to the settlement) (last accessed Mar. 2, 2013); see also Jeff Horowitz, Attorneys General Draw a Bead on Banks Force-Placed Insurance Policies, American Banker (Mar. 10, 2011, 12:25 PM), Among other terms, the settlement essentially prohibits servicers from profiting from force-placed insurance. Specifically, under the settlement, mortgage servicers: (a) shall not obtain force-placed insurance unless there is a reasonable basis to believe the borrower has not paid for property insurance; (b) cannot force-place insurance that is in excess of the greater of replacement value, last-known amount of coverage or the outstanding loan balance, on the secured property; (c) must work with the borrower to continue or reestablish the existing homeowner s policy; (d) shall continue to make payments if there is a lapse in payment and the payments are escrowed regardless of homeowner payment; and (e) must purchase the forceplaced insurance at a commercially reasonable price. Id.; see also United States v. Bank of America Corp., No. 1:12-cv (D.D.C Apr. 14, 2012) (Consent Judgment, ECF No. 14 Section VII). 61. Fannie Mae has changed its policies so as to curb bank and servicers improper practices. It issued a Service Guide Announcement on March 14, 2012 amending and clarifying 18

19 Case 0:12-cv JIC Document 36 Entered on FLSD Docket 03/04/2013 Page 19 of 40 its policies regarding the use, coverage, requirements, deductibles, carrier eligibility requirements and allowable expenses for lender-placed insurance for servicers of the loans it holds. See Fannie Mae Servicing Guide Announcement SVC The Fannie Mae guidelines seek to eliminate the abuses prevalent in the force-placed insurance industry including requiring that the cost of force-placed insurance be competitively priced and commercially reasonable and must exclude: Id. at 4. any lender-placed insurance commission earned on that policy by the servicer or any related entity; costs associated with insurance tracking or administration, or; any other costs beyond the actual cost of the lender-placed insurance policy premium. 62. The NYDFS hearings held in May 2012 on force-placed insurance practices have resulted in government action and findings that borrowers were overcharged for force-placed insurance. On June 12, 2012, Governor Cuomo s official website announced, DFS Investigation Indicates Insurance Companies Overcharged for Force-Placed Insurance. Available at It stated: Id. The evidence of higher than necessary insurance premiums was made clear at a recent DFS hearing. Also, the DFS discovered that the force-placed insurance market lacks the sort of competition that would keep premiums down. In New York, two companies have 90% of the market. In addition, the hearings made clear that force placed insurance costs are having a terrible impact on homeowners, while banks and insurers are profiting off the payments. 19

20 Case 0:12-cv JIC Document 36 Entered on FLSD Docket 03/04/2013 Page 20 of 40 CHASE AND THE FORCE-PLACEMENT OF WIND INSURANCE A. THE OPERATIVE AGREEMENT 63. The mortgage agreement between Chase (or its predecessors) and Plaintiffs contains two relevant provisions that are uniform to every Chase mortgage agreement: 5. Property Insurance. Borrower shall keep the improvements now existing or hereafter erected on the Property insured against loss by fire, hazards included within the term extended coverage including,but not limited to, earthquakes and floods, for which Lender requires insurance. This insurance shall be maintained in the amounts (including deductible levels) and for the periods that Lender requires. *** If Borrower fails to maintain any of the coverages described above, Lender may obtain insurance coverage, at Lender s option and Borrower s expense. Lender is under no obligation to purchase any particular type or amount of coverage. Lender may purchase such insurance from or through any company acceptable to Lender including without limitation, an affiliate of Lender, and Borrower acknowledges and agrees that Lender s affiliate may receive consideration for such purchase. 9. Protection of Lender s Interest and Rights Under this Security Instrument. If (a) Borrower fails to perform the covenants and agreements contained in this Security Instrument then Lender may do and pay for whatever is reasonable or appropriate to protect Lender s interest in the Property and rights under this Security Instrument (emphasis added); See Pulley Mortgage, supra (emphasis added); see also Davis Mortgage, supra. 64. Thus Chase s own non-negotiable adhesion contract provides its basis to forceplace wind insurance (see Pulley Mortgage, 5), but requires that actions taken to protect Lender s interest must be reasonable and appropriate (see id., 9). 20

21 Case 0:12-cv JIC Document 36 Entered on FLSD Docket 03/04/2013 Page 21 of 40 B. THE SYSTEM 65. Throughout the Class Period, Chase has entered into contracts, often referred to as master agreements with force-place insurers. On information and belief, these master agreements provide that the insurer will force place insurance on every property serviced by Chase that has not maintained the requisite insurance. Chase has had master agreements with several insurers, and the most recent one is with Assurant, which places hazard and flood insurance through its wholly owned subsidiary American Security Insurance Co. ( ASIC ) and wind insurance through its wholly owned subsidiary Voyager. 66. As part of the agreement between Chase and Assurant, Chase, through its CIA or J.P. Morgan Insurance subsidiaries, receives a commission based on a fixed percentage of the total premium. Accordingly, the higher the premium charged to the Plaintiffs and the members of the class, the higher are Chase s commission revenues. On information and belief, Chase also receives other direct cash payments from the insurers as part of the master force-place agreement. 67. During 2009, Assurant collected approximately $2.7 billion of premiums through its Specialty Insurance Division, which is overwhelmingly devoted to force-placed insurance. Notably, this insurer paid out only 36% of this amount in claims though in the company s other lines of business, a 70% claims-to-premiums ratio is the norm. Not surprisingly, far from being an excessive risk, force-placed insurance is actually this insurer s most profitable product. Id. Birny Birnbaum, in his testimony before the New York Attorney General, presented statistics collected by the NAIC reflecting nationwide loss ratios for LPI hazard insurance during the period as being, on average, more than thirty-five points higher than the ratios for commercially available homeowners policies. See Birnbaum NYDFS Testimony at 9. When 21

22 Case 0:12-cv JIC Document 36 Entered on FLSD Docket 03/04/2013 Page 22 of 40 confined to the period from , the disparity between LPI hazard insurance loss ratios and those of commercially available homeowners policies was nearly 42 points. Id. Defendants Conduct Results in Improper Charges to Borrowers 68. As American Banker observed, [w]hile servicers that partner with force-placed insurers customarily perform little of the work in monitoring their portfolios for lapses and writing policies, payments to them are simply a cost of doing force-placed business. See Ties to Insurers, supra. These costs are ultimately paid by the borrowers. 69. Assurant, Inc. s public filings indicate that approximately 40% of its force-placed insurance division s revenue is allocated to pay for general expenses. This category includes commissions/referral fees paid to lenders. In other lines of insurance, overhead and expenses are usually a much smaller fraction of policyholder claims. See Assurant Form 10-K for the year ending December 31, 2011, filed on February 23, 2012, at 61. Indeed, industry analysts have opined that referral fees, commissions and other payments to bank affiliates explain why insurers overhead, which is ultimately passed on to borrowers, is higher implying paydays for servicers amounting to hundreds of millions of dollars per year. See, e.g., Birnbaum NYDFS Testimony. 70. Premiums are inflated because they include tracking servicing costs and expenses on top of the cost of the force-placed insurance itself. Id. Premiums are also inflated by the payment of kickbacks to servicer affiliated insurance producers, such as CIA and JP Morgan Insurance, as these producers do not perform the activities typically associated with insurance producers and brokers, which justify a commission: The classic role of the insurance producer is to help the policyholder determine her insurance needs and shop the market for the insurance product that meets the policy holder s needs while seeking the most competitive prices for the product. Such 22

23 Case 0:12-cv JIC Document 36 Entered on FLSD Docket 03/04/2013 Page 23 of 40 Id. activities simply do not exist in [FPI] because there are only two national providers of the necessary package of insurance and related services and there is no price competition among the insurers. Soliciting new business consists of asking typically two venders for proposals and such activity is a rare event for most servicers. 71. Defendants practices tend to keep premiums for force-placed insurance artificially inflated because a percentage of borrowers premiums are not actually being paid to cover actual risk, but are simply funding illegal kickbacks. Amounts paid to servicers and their affiliates as commissions and reinsurance premiums have become a part of the cost of doing business for force-placed insurance providers. As a result, force-placed insurance premiums incorporate the payment of such kickbacks. 72. Defendants conduct has stifled competition. As the NAIC recently opined when asked whether pricing in the force-placed insurance industry is competitive, servicers have no incentive to select a competitively priced product, but instead would be more concerned with selecting one they know best protects the bank s interests or one where they are provided with an incentive or inducement to enter into the transaction. See Ties to Insurers, supra. C. THE INSURANCE 73. The wind insurance force-placed by Chase is issued by a surplus lines insurer, such as Voyager. Surplus lines carriers are not subject to rate proceedings or the same rigorous regulation as are admitted carriers. Surplus lines insurance is normally a highly competitive market for expensive or risky properties where the insured seeks the best coverage at the best price. Here, the insured, Chase, doesn t pay for the insurance and it neither seeks the best coverage nor the best price. Chase unlike the insured in the normal surplus lines situation seeks a higher premium and thus higher paybacks. Because of the higher rates of surplus lines 23

24 Case 0:12-cv JIC Document 36 Entered on FLSD Docket 03/04/2013 Page 24 of 40 insurance, every state, including Florida, requires that the insurance agency which places it (here CIA or J.P. Morgan Insurance) must first make a diligent effort to place the insurance with and admitted insurer. In Florida, when placing surplus lines insurance coverage, the producing agent must provide a properly documented statement of its diligent effort to obtain coverage from an admitted carrier. Similarly, in Texas, the agent must demonstrate a diligent effort to place the risk in the admitted market. Indeed, every state has a similar requirement of proof of diligent efforts to place the risk with an admitted carrier before the risk is placed with a surplus line carrier. 74. Pursuant to the master agreement between Chase and, no effort is made to place the borrower s wind insurance with an admitted insurer. Any failure to maintain proper wind insurance results in the automatic force-placement with a surplus line carrier, such as Voyager. On its face, it appears that the national requirement of diligence in first seeking an admitted carrier is contractually ignored by the master agreements between Chase and its surplus line wind insurance partners. 75. Because there are no rate hearings or insurance commission approvals for surplus lines coverage, the rates are what the market will bear. In the case of force-placed wind insurance, there is no real market and the rates are significantly higher than admitted carriers and other surplus line carriers that operate in a real world market. Indeed, on information and belief, Voyager only sells wind insurance through force-placement. 76. When the insurer force-places wind coverage for Chase, it often does so for an amount significantly higher than the amount of Chase s insurable interest, which is the outstanding loan balance. In those instances, the overage is for the benefit of the borrower and 24

25 Case 0:12-cv JIC Document 36 Entered on FLSD Docket 03/04/2013 Page 25 of 40 CIA or J.P Morgan Insurance the nominal agent for placement acts as the agent on behalf of the borrower. D. THE PLACEMENT 77. Although, Chase is the servicer of the mortgage loan, which work is paid for in the borrowers mortgage payments, Chase assigns out significant parts of its servicer duties to Assurant and its subsidiary Voyager. Voyager monitors all insurance coverage, sends all correspondence regarding insurance (under Chase s name) and places the insurance. These are costly services which, as part of the master agreement, are free or at significantly reduced costs to Chase. Moreover, the premium is determined by Voyager without constraint by state regulators, Chase or, most importantly, the borrower who pays for it. 78. Because neither Chase nor CIA makes any effort to control the coverage premium in a force-placement the rates are extraordinarily high, with no relation to the marketplace. Similarly, there are no constraints placed on Voyager with respect to coverage and back-dating. In essence, Chase abdicates its contractual requirement of reasonableness to the rewards available in force-placing over-priced insurance on properties whose owners have no ability to negotiate. CLASS ACTION ALLEGATIONS 79. Plaintiffs bring this action pursuant to Rule 23 of the Federal Rules of Civil Procedure on behalf of the following proposed classes: THE CLASS: All persons that have or had a residential mortgage loan from or line of credit serviced by Chase secured by property in any of the following states: Alabama, Florida, Georgia, Hawaii, Louisiana, Mississippi, North Carolina, South 25

26 Case 0:12-cv JIC Document 36 Entered on FLSD Docket 03/04/2013 Page 26 of 40 Carolina, and Virginia on which wind insurance was force- placed at any time between May 1, 2008 and the date of final judgment in this lawsuit; and THE FLORIDA SUBCLASS: All members of the Class whose secured property was located in Florida. 80. The Class excludes Defendants and any entity in which Defendants have a controlling interest, and their officers, directors, legal representatives, successors and assigns and the Judge or Magistrate Judge to whom the case is assigned, as well as the Judge's immediate family members. 81. The Class is so numerous that joinder of all members is impracticable. 82. A Class action is superior to all other available methods for the fair and efficient adjudication of this controversy. 83. Plaintiffs claims are typical of the claims of the Class. 84. There are questions of law and fact common to the Class, including but not limited to: (a) Whether defendants Deed of Trust is an adhesion contract; (b) Whether Chases contract required it to act reasonably and appropriately in force-placing insurance to protect its interest; (c) Whether defendants force-placement scheme and conduct breached Chases contract with Plaintiffs and the class; (d) Whether Chase received payments from insurance providers that exceeded the value of any services actually performed by Chase; (e) Whether as a kickback to Chase the insurance defendants provided expensive services such as monitoring at free or reduced fees; (f) Whether defendants back-dated force-placed wind insurance policies; (g) Whether defendants force-placed wind coverage in amounts greater than Chase s insurable interest in the property; 26

27 Case 0:12-cv JIC Document 36 Entered on FLSD Docket 03/04/2013 Page 27 of 40 (h) Whether defendants improperly charged plaintiffs and the class for the period between placement of wind insurance by the Borrower and acceptance by defendants; (i) Whether the force-placed scheme violated Chases duty of good faith and fair dealings; (j) Whether CIA and/or JP Morgan Insurance Company, acted as insurance agents for Plaintiffs and the class; (k) Whether CIA and/or JP Morgan Insurance Company, owed a fiduciary duty to Plaintiffs and the class; (l) Whether the Chase Insurance defendants breached their fiduciary duty to Plaintiffs and the class; (m) Whether Assurant induced and/or participated in Chases breach of contract and/or Chase Insurance defendants breach of fiduciary duty; (n) Whether defendants scheme and conduct constituted deceptive or unfair trade practice pursuant to FL. Start , et seq.; (o) Whether defendants have been unjustly enriched by their force-place scheme; and (p) Whether defendants are liable to the class for damages, and the measure of damages. 85. These and other questions of law and/or fact are common to the Class and predominate over any questions affecting only individual Class members. 86. The same common issues predominate with respect to all Class members, regardless of whether their loans were originated by or merely serviced by Defendants. 87. Plaintiffs will fairly and adequately represent and protect the interests of the members of the Class. Plaintiffs have no claims antagonistic to those of the Class. Plaintiffs have 27