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Charles and Wendy Edwards alleged that their mortgage servicer breached their mortgage contract by, among other things, "charging them for excess and unnecessary forced-placed coverage, including retroactive coverage." Edwards v. Green Tree Servicing, LLC, No. 5:15cv148-MW/GRJ, 2015 WL 6777463, at *4 (N.D. Fla. October 22, 2015). The District Court dismissed what it called the "retroactive coverage" claim with prejudice because in the eyes of the Court in this case, there was no "plausible" allegation the Edwards could make that the mortgage servicer breached the mortgage contract by forcing the Edwards' to pay premiums for "retroactive coverage," i.e., for periods when there was no coverage.
The District Court with all respect was wrong in this conclusion. Other rulings in this case have drawn praise in this space. But the District Court was wrong in relying on a Seventh Circuit decision which is bereft of insurance knowledge under Illinois law, and on a Minnesota District Court decision in which it was apparently clear that there was a risk of potential damage to the collateral during the backdated time period.
Here, it is not clear whether there was, or was not, a potential claim of damage to the collateralized property, i.e., the Edwards' home, during the backdated time period. Parenthetically, although the defendant servicer asserted to the Edwards' that there was a time period with no insurance coverage contrary to their agreement, Mr. and Mrs. Edwards disagreed that there was any such thing.
In any case, for several reasons it does not have to be clear that there was no potential for a claim during the backdated period of time. Claims against lenders and their loan servicers based on backdated "insurance" are upheld with regularity.
Insurance operates prospectively, not retroactively. It operates to protect against future risk, not past wagers. See Dennis J. Wall, "'Backdated' Insurance is Not Insurance at All. It is a Penalty," 37 Insurance Litigation Reporter 509 (November 20, 2015 issue). A pdf of this article can be obtained on www.lenderforceplacedinsurance.com.
The case for plausibility should increase, certainly, if the plaintiffs can truthfully allege as a matter of fact that there is no possibility of a claim for damage to the house during the backdated period.
In any case, if a loan servicer, as in the Edwards case, forces borrowers to pay money for something which is not insurance at all but a penalty instead, then the loan servicer has "plausibly" breached this uniform mortgage contract because the servicer did not obtain "insurance" but instead imposed a penalty which is something the servicer is not authorized by the mortgage to do:
If Borrower fails to maintain any of the coverages described above, Lender may obtain insurance coverage, at Lender’s option and Borrower’s expense.
(Paragraph 5 of the Uniform Mortgage Instrument which is the same Paragraph 5 in the Edwards' mortgage, alleged in Paragraph 69, on page 23 of their complaint filed as Docket No. 14 on August 28, 2015. [Emphasis added.])
In sum, it is "plausible that the Edwards could allege that Green Tree Servicing breached the contract by force-placing retroactive coverage," to work with the words of the District Court in dismissing the Edwards' claim on this ground, with prejudice. Edwards v. Green Tree Servicing, LLC, No. 5:15cv148-MW/GRJ, 2015 WL 6777463, at *5 (N.D. Fla. October 22, 2015).
Please Read The Disclaimer. ©2015 by Dennis J. Wall, author of "Lender Force-Placed Insurance Practices" (American Bar Association 2015). All rights reserved.
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