Flood Insurance Could Bring Flood of Anti-Servicer or Anti-Mortgagee Litigation
Spring rains help flowers bloom but also bring to mind possibilities of freshwater floods. Flood insurance definitely has its place in prudent mortgage lending. Mishandling of flood insurance covenants by a mortgage loan servicer or mortgagee, however, can lead to a “flood” of anti-servicer or anti-mortgagee litigation. Read on for an important update on such litigation.
A Mr. Casey and a Mr. Skinner filed a purported New York class action suit known as Casey v. Citibank, et al. They alleged several causes of action related to flood insurance. According to the U.S. District Court for the Northern District of New York, here are Casey’s allegations:
Casey’s mortgage contained this provision:
Fire, Flood, and Other Hazard Insurance. Borrower shall insure all improvements on the Property, whether now in existence or subsequently erected, against any hazards, casualties, and contingencies, including fire, for which Lender requires insurance. This insurance shall be maintained in the amounts and for the periods that Lender requires. Borrower shall also insure all improvements on the Property, whether now in existence or subsequently erected, against loss by floods to the extent required by the Secretary [of the Department of Housing and Urban Development (“HUD”)].
After allegedly accepting flood insurance at a level of less than $35,000 for several years, Citi demanded that Casey increase coverage by $107,780 and eventually force-placed coverage in that amount. Casey’s objections caused him to sue. He alleged, among other things, damages in increased premiums that breached the mortgage (breach of contract) and also subjected Citi to liability under New York’s Deceptive Practices Act. The defendant banks moved to dismiss the suit. The court recently denied the motion, ruling that Casey’s claims are viable at least for now. The court noted that the lender’s discretion in the second-to-last sentence quoted above arguably did not apply to flood insurance. Instead, Casey arguably could satisfy any flood insurance covenant by providing only the minimum flood coverage “required by” HUD, as per the last quoted sentence above.
Citi’s motion to dismiss Skinner’s claims related to breach of mortgage also failed but for a different reason. The terms of Skinner’s mortgage apparently did not include the last-quoted sentence above and also contained some different language elsewhere. But Citi was not the lender, in the court’s view. The discretionary power to require insurance in Skinner’s mortgage was only for the lender. Citi, being only the servicer of Skinner’s mortgage, lacked discretion to require various amounts of flood insurance.
Many states, such as Nebraska and Colorado, have an unfair deceptive acts and practices statute that authorizes certain private suits. In states with such a statute, an aggrieved mortgagor may have at least two claims for relief. But even in states lacking the statute, the mortgagor could assert a contract claim for breach of mortgage. Whether or not your state has such a statute, be alert to possible breaches of mortgages and deeds of trust related to flood insurance.