Split Panel Upholds Dismissal of Force-Placed Insurance Claims Under Filed-Rate Doctrine

Last week, a split panel of the Eleventh Circuit upheld the dismissal of a class action over “force-placed insurance” under the filed-rate doctrine.  Patel v. Specialized Loan Servicing, LLC, 2018 WL 4559091 (11th Cir. Sept. 24, 2018).

The “force-placed insurance” in question concerns the residential mortgage market.  A typical mortgage contract requires the borrower to obtain hazard insurance for the value of the remaining loan balance.  If the borrower fails to maintain such insurance, the lender is entitled to “force-place” insurance on the borrower’s behalf and charge the borrower for the cost.

After the plaintiffs in this case failed to maintain hazard insurance, their loan servicers (acting in the lenders’ stead) obtained force-placed insurance with American Security Insurance Company (“ASIC”) and passed the charges on to the plaintiffs.  ASIC’s rates had been filed with state insurance regulators in Florida and Pennsylvania (the relevant jurisdictions).  The plaintiffs sued the loan servicers and ASIC under state and federal law, alleging that their mortgage contracts required the loan servicers to pass on to them the true cost of obtaining the force-placed insurance.  According to the plaintiffs, the loan servicers had violated the contracts by retaining the benefit of various “kickbacks” in the form of commissions and discounts to ASIC’s services.  Plaintiffs argued that the value of these “kickbacks” should have been deducted from the stated price of the force-placed insurance that they were charged.

In district court, the defendants successfully argued that the action was barred by the filed-rate doctrine.  A divided panel of the Eleventh Circuit affirmed.  The judges agreed that the filed-rate doctrine operates to bar certain claims against regulators empowered by legislatures to approve filed rates.  They also agreed that it is underpinned by two principles:  the “nonjusticiability principle,” which is that courts should not second-guess ratemaking agencies’ determinations; and the “nondiscrimination principle,” which requires that all rate-payers be charged the same rate.  They disagreed about almost everything else.

Writing for the majority, Judge Danny Boggs of the Sixth Circuit (sitting by designation) first reviewed case law to determine that the applicability of the filed-rate doctrine does not turn on whether the plaintiff is a rate-payer.  Judge Boggs then clarified the framework for determining whether the filed-rate doctrine bars a cause of action.  It does so if either:  (1) the complaint facially attacks a filed rate; or (2) the complaint implicates the nonjusticiability principle by challenging the components of a filed rate.

Recognizing that neither Florida nor Pennsylvania courts had determined that their insurance regulators were subject to the filed-rate doctrine (which is of federal origin), Judge Boggs looked to the relevant statutes to determine that those agencies were endowed with ultimate authority over ratemaking—and thus, he reasoned, that state courts would likely hold their rates to be subject to the filed-rate doctrine.

Turning to whether the plaintiffs facially attacked a filed rate, Judge Boggs had little trouble concluding from the complaint that they did because they repeatedly alleged that ASIC’s filed rate was too high.  In dicta, the majority also endorsed the view of the Second Circuit that challenges to alleged “kickbacks” implicitly contest the components of a filed rate (and thus are barred) because they are necessarily based on the theory that the “kickback” should have been incorporated into the filed rate.  See Rothstein v. Balboa Ins. Co., 794 F.3d 256, 259, 262 (2d Cir. 2015).

In a passionate dissent, Judge Adalberto Jordan wrote that he would certify the question of whether Florida and Pennsylvania recognized the filed-rate doctrine to the states’ respective supreme courts.  Judge Jordan reasoned that neither state has adopted the doctrine and that other states have chosen not to recognize the doctrine, or to recognize a narrower version.  He argued that an examination of the breadth of the delegation to the states’ respective insurance regulators cannot provide the answer to the question of whether the states would adopt the filed-rate doctrine in the first place.

Judge Jordan also diverged from the majority on the application of the filed-rate doctrine.  He disagreed that the suits really challenged filed rates because they attacked the costs passed on by the loan servicers.  A victory for the plaintiffs, Judge Jordan reasoned, would not require ASIC to charge the loan servicers a different rate; it would simply require the loan servicers to pass on a different fee to the plaintiffs under their separate contract.  Judge Jordan also argued that the loan servicers—entities not regulated by the state insurance regulators—should not be able to take advantage of the filed-rate doctrine by contractually linking their charges to a filed rate.

Posted by Nick Boyd.

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