The Cuomo Administration announced that its nation-leading force-placed insurance reforms will now cover 100 percent of the New York market after the New York State Department of Financial Services (DFS) reached agreements with the four remaining New York force-placed insurers that had not yet agreed to implement those reforms: American Modern Insurance, Chubb, Fidelity and Deposit Company of Maryland, and FinSecure.
The Cuomo Administration’s force-placed insurance reforms – which the two largest force-placed insurers, Assurant and QBE, had previously agreed to implement through settlements with DFS – will help better protect homeowners from abuse; eliminate the kickbacks DFS uncovered in this industry; and save homeowners, taxpayers, and investors millions of dollars going forward through lower rates.
Benjamin M. Lawsky, Superintendent of Financial Services, said: “These reforms will now cover all of the New York market, but more can and should be done. Unless other regulators across the country move swiftly to crack down on the kickbacks and payoffs we found in the force-placed insurance industry, millions of Americans will remain at risk. We’re continuing to urge other regulators to implement the reforms New York helped pioneer so that every single homeowner is protected.”
DFS’ reform settlement with American Modern Insurance includes a $1 million penalty and restitution for homeowners who were harmed. Chubb, Fidelity and Deposit Company of Maryland, FinSecure – which had each written relatively smaller volumes of force-placed insurance and were not found to have engaged in the kickback arrangements uncovered at other companies – voluntary agreed to sign proactive codes of conduct implementing New York’s reforms.
DFS’s Investigation into Force-placed Insurance
In October 2011, DFS launched an investigation into the force-placed insurance industry. Force-placed insurance is insurance taken out by a bank, lender, or mortgage servicer when a borrower does not maintain the insurance required by the terms of the mortgage. This can occur if the homeowner allows their policy to lapse (often due to financial hardship), if the bank or mortgage servicer determines that the borrower does not have a sufficient amount of coverage, or if the homeowner is force-placed erroneously.
DFS’s investigation revealed that the premiums charged to homeowners for force-placed insurance can be two to ten times higher than premiums for voluntary insurance -- despite the fact that force-placed insurance provides far less protection for homeowners than voluntary insurance. Indeed, even though banks and servicers are the ones who choose which force-placed insurance policy to purchase, the high premiums are ultimately charged to homeowners, and, in the event of foreclosure, the costs are passed onto investors. And when the mortgage is owned or backed by a government-sponsored enterprise, such as Fannie Mae or Freddie Mac, those costs are ultimately borne by taxpayers.
DFS’s investigation revealed that certain force-placed insurers competed for business from the banks and mortgage servicers through what is known as “reverse competition.” That is, rather than competing by offering lower prices, the insurers competed by offering what is effectively a share in the profits. This profit sharing pushed up the price of force-placed insurance by creating incentives for banks and mortgage servicers to buy force-placed insurance with high premiums. That’s because the higher the premiums, the more that the insurers paid to the banks. This troubling web of kick-backs and payoffs at certain force-placed insurers helped push premiums sky-high for many homeowners.
Agreements with American Modern Insurance, Chubb, Fidelity and Deposit Company of Maryland, and FinSecure
The settlement DFS reached today with American Modern Insurance includes restitution for homeowners, a $1 million penalty paid to the State of New York, and a requirement that the company implement the Cuomo Administration’s nation-leading force-placed insurance reforms. American Modern will also be required to lower its premium rates going forward, providing significant savings to homeowners, taxpayers, and investors.
Chubb, Fidelity and Deposit Company of Maryland, FinSecure – which had each written relatively smaller volumes of force-placed insurance and were not found to have engaged in the kickback arrangements uncovered at other companies – agreed to sign proactive codes of conduct implementing New York’s reforms.
Superintendent Lawsky said: “I'd like to particularly commend Chubb, Fidelity & Deposit, and FinSecure for stepping up to the plate and moving swiftly to adopt these important reforms.”
New York’s nation-leading reforms include the following prohibitions:
►Force-placed insurers shall not issue force-placed insurance on mortgaged property serviced by a bank or servicer affiliated with the insurers.
►Force-placed insurers shall not pay commissions to a bank or servicer or a person or entity affiliated with a bank or servicer on force-placed insurance policies obtained by the servicer.
Force-placed insurers shall not reinsure force-placed insurance policies with a person or entity affiliated with the banks or servicer that obtained the policies.
►Force-placed insurers shall not pay contingent commissions based on underwriting profitability or loss ratios.
►Force-placed insurers shall not provide free or below-cost, outsourced services to banks, servicers or their affiliates.
►Force-placed insurers shall not make any payments, including but not limited to the payment of expenses, to servicers, lenders, or their affiliates in connection with securing business.
DFS will soon issue regulations that include the Cuomo Administration's force-placed insurance reforms, which would cover any company – present or future – that decides to offer force-placed insurance in New York.