The U.S. Court of Appeals for the Third Circuit recently affirmed the dismissal of allegations that a mortgage lender colluded with an insurance company and insurance agent to inflate the rate of the borrowers’ force-placed hazard insurance policies in violation of various consumer protection statutes, RICO, and the common law.
In so ruling, the Third Circuit agreed that the borrowers’ challenges to their policies’ rates were barred by the “filed-rate doctrine,” which requires insurers to file their rates with an administrative agency and prohibits charging premium rates other than the filed rates, and prevents courts from deciding whether the rate is unreasonable, even if the insurance company defrauded an administrative agency to obtain approval of the rate.
A copy of the opinion in Leo v. Nationstar Mortgage LLC is available at: Link to Opinion.
The plaintiff borrowers’ reverse-mortgage lender purchased forced-placed hazard insurance policies to protect its interest in the borrowers’ properties. The lender charged the borrowers amounts consistent with the rates filed with New Jersey’s filed-rate doctrine.
As you may recall, New Jersey’s filed-rate doctrine requires insurers to file rates they will charge with an administrative agency, and forbids an insurer from “charg[ing] rates . . . other than those properly filed with the appropriate . . . regulatory authority.” Ark. La. Gas Co. v. Hall, 453 U.S. 571, 577 (1981).
The borrowers filed suit in federal court alleging that their lender illegally colluded with a hazard insurance company and insurance agent to pocket kickbacks on force-placed insurance policies asserting claims for alleged breach of their mortgages (or in the alternative New Jersey law prohibiting unjust enrichment), as well as violations of: (i) New Jersey’s implied covenant of good faith and fair dealing; (ii) the New Jersey Consumer Fraud Act, N.J. Stat. Ann. §§ 56:8-1–56:8-20; (iii) New Jersey law preventing tortious interference with a business relationship; (iv) the federal Truth in Lending Act, 15 U.S.C. §§ 1601–1665, and; (v) the federal Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. §§ 1961–1968.
Although the borrowers concede they paid an amount consistent with the filed rate, they argued that the insurer inflated the rate filed with state regulators such that it and the agent could return a portion of the profits to the lender to induce its continued business.
The trial court dismissed the allegations, holding that the borrowers’ claims were barred by the filed-rate doctrine. The borrowers timely appealed.
On appeal, the borrowers argued that the Third Circuit’s ruling in Alston v. Countrywide Financial Corporation, 585 F.3d 753 (3d Cir. 2009), guided the adjudication of the facts at bar. In Alston, the plaintiffs filed a putative class action suit against their mortgage lender alleging that it referred its customers to obtain mortgage insurance from insurers for which the lender agreed to assume some risk in exchange for some of the plaintiffs’ premiums. The Alston plaintiffs alleged that the lender violated their rights under the federal Real Estate Settlement Procedures Act, 12 U.S.C. 2605, et seq., by receiving unlawful kickbacks and unearned fees. Alston, 585 F.3d at 755.
However, the Third Circuit reasoned that Alston was distinguishable, because in that case, the plaintiffs were not seeking damages tied to the amount of an alleged overcharge as the borrowers here, but instead sought statutory damages, which allowed them to dodge the filed-rate doctrine. Id. See also Patel v. Specialized Loan Servicing, LLC, 904 F.3d 1314, 1327 n.8 (11th Cir. 2018).
The Third Circuit reiterated that “there is no fraud exception to the filed rate doctrine” (AT&T Corporation v. JMC Telecommunications, LLC 470 F.3d 525, 535 (3d Cir. 2006)) and the doctrine holds no distinction between challenging a filed rate as unreasonable and challenging a fraudulent overcharge included in a filed rate, as it did in its prior decisions involving allegations that insurance companies “’collectively set and charge[d] uniform and supra-competitive rates,’ and ’embed[ded] within th[o]se . . . rates payoffs, kickbacks, and other charges that are unrelated to the issuance of  insurance.’” In re N.J. Title Ins. Litig., 683 F.3d at 454; McCray v. Fidelity National Title Insurance Co., 682 F.3d at 234-35.
Instead, the filed-rate doctrine seeks to “preserv[e] the exclusive role of . . . agencies in approving rates . . . by keeping courts out of the rate-making process.” In re N.J. Title Ins. Litig., 683 F.3d at 455-56 (internal citations omitted).
The Third Circuit cautioned that anything to the contrary would require courts to calculate damages based upon a determination of how much they think they should have been charged for their force-placed insurance, and would also be giving the borrowers a better price for their policies than other borrowers using a different lender, but still obtaining force-placed policies from the insurer. Keogh v. Chicago & N.R. Co., 260 U.S. 156, 163 (1922) (observing that allowing “damages resulting from the exaction of a[n inflated filed] rate” would, “like a rebate, operate to give [a plaintiff] a preference over his . . . competitors”). The Third Circuit further noted that this reasoning has been upheld throughout other circuits. See Patel, 904 F.3d 1314 (11th Cir.) (filed-rate doctrine barred challenges to reasonableness of force-placed insurer’s premiums) ; Rothstein v. Balboa Ins. Co., 794 F.3d 256 (2d Cir. 2015) (striking borrowers’ RICO claim alleging fraud for filed force-placed insurance rates that did not reflect secret ‘rebates’ and ‘kickbacks.’); H.J. Inc. v. Nw. Bell Tel. Co., 954 F.2d 485, 492 (8th Cir. 1992) (filed-rate doctrine prevents a RICO suit for damages relating to a fraudulent rate).
Because the filed-rate doctrine prevents courts from deciding whether the rate is unreasonable or fraudulently inflated, the trial court’s dismissal of the borrower’s claims was affirmed.