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From Banking and Finance Law Daily, October 14, 2013

Force-placing insurance through affiliate not illegal tying practice

By Richard A. Roth, J.D.

Buying a flood insurance policy and providing insurance agent services do not constitute two separate services that could be tied together, the U.S. District Court for the Northern District of California has decided. As a result, the court dismissed a putative class action claiming that Wells Fargo Bank’s practice of force-placing flood insurance through an affiliated insurance agent violated the Bank Holding Company Act prohibition on tying arrangements (Lane v. Wells Fargo Bank, N.A., Oct. 10, 2013, Alsup, District Judge).

According to the facts related by the court, the homeowner’s mortgage loan, originally with a different lender, was assigned to and serviced by Wells Fargo. The home was located in a flood hazard area, meaning the homeowner was required to maintain flood insurance. When she failed to do so, Wells Fargo warned her that it would purchase insurance and charge her for the cost—i.e. it would “force-place” the policy—and then bought insurance through an insurance agent owned by its holding company.

The homeowner alleged that the bank force-placed insurance through exclusive arrangements with two insurance companies and received kickbacks from the companies in exchange for the business. She also alleged that the bank retroactively bought insurance for earlier periods during which there had been no flooding in order to increase its profits.

Tying arrangement described. Among the homeowner’s claims were that the bank’s method of buying insurance violated the BHCA ban on tying arrangements. The BHCA says that a bank may not furnish any service on the condition that the customer agrees to obtain a second service either from the bank’s holding company or a subsidiary of the holding company (12 U.S.C. 1972(1)(b)). According to the homeowner, Wells Fargo tied the bank’s purchase of a flood insurance policy—the tying service—to the homeowner’s acceptance of insurance agent services—the tied service—from the affiliated agent.

The bank argued that this did not describe an illegal tying arrangement. It asserted that the two services in fact constituted but a single service because there was no consumer demand for one without the other.

Absence of distinct services. The judge agreed with the bank that there were not two distinct services that could be tied together. The service of purchasing insurance and the service of being the agent for the purchase were all one service, the judge decided. There was no consumer demand for one service without the other.

The judge also rejected the homeowner’s assertion that the tied service could be “the commission of unspecified services.” There could not be a consumer demand for an unspecified service, the judge pointed out.

Alternative tying service. The homeowner’s attempt to redefine the tying service as the bank’s continued extension of credit or as the provision of loan servicing services also failed. Even if either of those had been described in the homeowner’s complain—and they had not—there would have been no tie. The homeowner was free to buy insurance on the open market from any company she chose before the insurance was force-placed, the judge pointed out. The use of the affiliated agency’s services could not have been tied to the bank’s services when the homeowner was not compelled to use the agent.

The case is No. C 12-04026 WHA.

Attorneys: Jeff D. Friedman (Hagens Berman Sobol Shapiro LLP) for Mercedes Guerrero. Jonah Sampson VanZandt (Severson and Werson) for Wells Fargo Bank.

Companies: American Security Insurance Company; QBE Insurance Corporation; Wells Fargo Bank, N.A.; Wells Fargo Insurance, Inc.

MainStory: TopStory BankingOperations ConsumerCredit FloodInsurance Loans Mortgages

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