A borrower defaulted on her mortgage loan by failing to maintain insurance on her home, and then sued the lender and its insurance-agency affiliate in a class action lawsuit for fraud, consumer fraud, breach of contract, and unjust enrichment. The District Court dismissed the complaint in its entirety and the Court of Appeals for the Seventh Circuit affirmed, but on different grounds.
The case of Cohen v. American Security Insurance Co., 11-3422, 2013 WL 5890642 (7th Cir. Nov. 4, 2013) is interesting because the borrower sued the lender and its insurance agency because, according to the Seventh Circuit, the borrower breached the contract and the lender did exactly what the contract authorized. The borrower’s case was dead on arrival as the court’s opinion made clear that it believed the mortgage agreement specifically stated that the lender could force-place potentially more expensive insurance, the cost and any fees for which the borrower would be responsible. Further, the borrower would be responsible for paying for such insurance and any attributed fees.
In Cohen, the borrower purchased her townhome in March of 2006, and the mortgage specifically required the borrower to maintain hazard insurance. The mortgage also gave the lender the right to purchase insurance for the property and specifically indicated that such insurance may cost more than what the borrower could have purchased on her own. Notice, however, was required to be given to the borrower before the lender could force-place insurance. In May 2008, the lender sent the borrower a notice that her insurance policy had lapsed and requested proof of insurance within 14 days. The borrower did not respond. In June 2008, the lender sent another letter requesting proof of insurance and notified the borrower that it had obtained temporary insurance coverage for the property and that the borrower was responsible for the cost. The lender also informed the borrower that if she provided proof of insurance, they would cancel the force-placed insurance and refund any premiums paid by her. The lender further warned the borrower that they would acquire a 12-month insurance policy and charge the borrower for the premium and for the cost if she did not provide proof of insurance. In July 2008, after the borrower still did not respond to the lender’s letters, the lender sent more correspondence informing the borrower that they had obtained the 12-month policy but that the policy would be cancelled if the borrower obtained her own insurance.
Rather than obtaining her own insurance, the borrower sued the lender and its insurance company in a class action lawsuit for fraud, consumer fraud, unjust enrichment, and breach of contract. The district court dismissed the claims against the lender on preemption grounds and against the insurance company under the filed-rate doctrine. The Seventh Circuit, however, indicated that they could avoid the “nuanced questions of federal preemption and the filed-rate doctrine” because the district court properly dismissed the case for a different and more fundamental reason: the borrower failed to state a claim upon which relief could be granted.
The most interesting part about the Cohen case is how the Seventh Circuit repeated time and again how the lender did everything that it possibly could to not only make the borrower aware of her obligations to purchase insurance, but also to incentivize her to do so. The court quoted the loan documents to show that the lender clearly disclosed to the borrower what her obligations were regarding insurance. The court also noted that the lender wrote to the borrower multiple times to warn her of the consequences for her failing to purchase insurance and to give her the opportunity to cure the problem in order to prevent additional financial problems.
The bottom line is that the lender was protected because its loan documents clearly informed the borrower of her obligations and the consequences for failing to abide by the contract, and because it gave the borrower, in writing, many opportunities to cure her breach. If the loan documents had not contained clear requirements for the borrower, or if the lender had not given the borrower several opportunities to cure, then the case may not have been dismissed so easily by the court. However, the clarity of the documents juxtaposed with the communications from the lender made this an easy dismissal for the Seventh Circuit.