Seventh Circuit Rejects Force-Placed Insurance Claim

The case is captioned Randy Cohen v. American Security Insurance Company and Wachovia Mortgage, 11-3422. It is an important case because it offers a thoughtful and thorough discussion of this problematic issue.

Mortgage lenders often require the home owner (borrower) to maintain hazard insurance on the mortgaged property. As the Court notes, the purpose of the insurance is "to protect the lender's interest in the collateral."

Problems arise when the borrower fails to keep the property insured. The mortgage lender then purchases insurance for the borrower, usually at a cost far higher than the typical homeowner's insurance policy.

One plaintiff in the case, Martha Schilke, alleged that the lender fraudulently placed insurance on her home when her own homeowner's policy lapsed.

The Seventh Circuit rejected her claim, holding that she (and the other plaintiff) had not stated a plausible claim in their complaints. The Court holds as follows:

"The loan agreement and related disclosures and notices conclusively demonstrate that there was no deception at work. It was Schilke's responsibility to maintain hazard insurance on the property at all times; if she failed to do so, Wachovia had the right to secure the insurance itself and pass the cost on to her. Wachovia fully disclosed that lender-placed insurance may be significantly more expensive than her own policy and may include a fee or other compensation to the bank and its insurance-agency affiliate. In short, maintaining property insurance was Schilke's contractual obligation and she failed to fulfill it; because the consequences of that failure were clearly disclosed to her, none of her claims for relief can succeed."

The opinion describes the multiple warnings the borrower received before Wachovia purchased insurance for her benefit.

Edward X. Clinton, Jr.