Critics Assail Chase's Force-Placed Insurance Settlement

Homeowners who were allegedly overcharged for insurance on their JPMorgan Chase (JPM) mortgages could receive as much as $291 million under the settlement of a lawsuit, according to lawyers who crafted the deal.

But critics of the agreement argue that only a small fraction of that amount will ever be paid. They point out that the settlement requires homeowners to file claim forms, a process that often yields low participation rates, rather than making payments automatic.

"I just think it's a very weak settlement," says Robert Hunter, a consumer advocate who formerly served as Texas insurance commissioner. "If you don't send in some kind of form, you don't get anything."

Hunter and other critics — who include consumer advocates and plaintiffs lawyers not involved in the suit — are also skeptical that the settlement will bring down premium payments for homeowners who are issued force-placed insurance policies after their voluntary policies lapse.

The proposed settlement, filed last week in U.S. District Court in Miami, involves Chase, the nation's largest bank, and Assurant (AIZ), the country's biggest provider of force-placed insurance. Under the deal, the two companies agreed to pay affected borrowers 12.5% of the insurance premiums they were charged, as long as the homeowners file valid claims.

Adam Moskowitz, the plaintiff's lawyer who made the deal with Chase and Assurant, has suggested that the settlement could serve as a template for potential future settlements with other big banks. His firm has also brought suits against Citigroup (NYSE: C), Bank of America (BAC) and HSBC.

Under the settlement with Chase and Assurant, Moskowitz and his legal team stand to receive up to $20 million.

For years, banks have been able to pad their mortgage profits by partnering with insurance companies that set force-placed insurance premiums at extremely high levels and then use various methods to funnel much of the money back to the bank. Those methods include, but are not limited to, commissions paid to the banks and reinsurance arrangements.

Under the settlement proposal, Chase and Assurant agreed to a ban on both commissions and certain reinsurance deals. But the deal's critics say those are not major concessions, since such arrangements have already fallen out of favor.

In March, the Federal Housing Finance Agency, which has enormous sway over the mortgage market due to its oversight of Fannie Mae and Freddie Mac, proposed restrictions on commissions and reinsurance activities.

A Chase spokeswoman says that the bank discontinued its use of commissions in 2010 and that it ended its reinsurance arrangement with Assurant earlier this year.

The settlement filed last week also includes a provision barring Assurant from providing free or below-cost services to Chase, but it makes an exception for services related to tracking the status of the homeowner's insurance policy. This provision suggests that Assurant can continue to provide such services to Chase either for free or at less than cost.

"It seems to me to be an exception that you can drive a truck through," says an attorney who did not work on the proposed settlement, but is involved in other legal matters involving force-placed insurance.

New York officials have stated that over a seven-year period, Chase made approximately $600 million by taking 75% of the profits from the business it sent to Assurant.

The settlement's exception for free or below-cost tracking services is similar to language in consent orders that the state of New York signed with insurers earlier this year.

Chase, Assurant, and the lawyer who represented the plaintiffs have all declined to discuss the terms of the proposed settlement.

One reason why critics expect homeowner participation to be low is that claims can only be filed through the mail, not over the Internet.

In an earlier settlement involving Wells Fargo's force-placed insurance practices, which also required affected homeowners to file claims, only 9.6% of eligible homeowners did so prior to the deadline, according to a court document. Some of those claims could still be disqualified if they do not meet the settlement's requirements.

"It's no $300 million blockbuster settlement," says a second lawyer who is working on force-placed insurance litigation, but did not participate in the Chase settlement. "I expect that no more than $10 million-$20 million — maybe less — will ever be paid out, in exchange for a full release from liability."