Cohen v. Am. Sec. Ins. Co.

• Citation: 735 F.3d 601
• Decision Date: 04 November 2013
• Docket Number: No. 11–3422.,11–3422.
• Parties: Randy COHEN, both individually and as a representative of all other persons similarly situated, Plaintiff–Appellant, v. AMERICAN SECURITY INSURANCE COMPANY, and Wachovia Mortgage, FSB f/k/a World Savings Bank, FSB, Defendants–Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (7th Circuit)

735 F.3d 601

Randy COHEN, both individually and as a representative of all other persons similarly situated, Plaintiff–Appellant,

v.AMERICAN SECURITY INSURANCE COMPANY, and Wachovia Mortgage, FSB f/k/a World Savings Bank, FSB, Defendants–Appellees.

No. 11–3422.

United States Court of Appeals, Seventh Circuit.

Argued Sept. 13, 2012.

Decided Nov. 4, 2013.

Thomas F. Courtney, Jr., Thomas F. Courtney & Associates PC, Palos Heights, IL, John S. Xydakis, Forest Park, IL, for Plaintiff–Appellant.

Franklin G. Burt, Jorden Burt, Washington, DC, Mark B. Blocker, Robert N. Hochman, Sidley Austin LLP, Chicago, IL, for Defendants–Appellees.

Before MANION, SYKES, and HAMILTON, Circuit Judges.

SYKES, Circuit Judge.

Home-mortgage lenders often require the borrower to maintain hazard insurance on the mortgaged property to protect the lender's interest in the collateral. If the borrower fails to keep the property insured, the lender has the option to secure the insurance itself and pass the cost on to the borrower.

In this proposed class action, Martha Schilke alleges that Wachovia Mortgage, FSB, her lender and holder of a mortgage on her home, fraudulently placed insurance on her property when her homeowner's policy lapsed. Wachovia secured the replacement coverage from American Security Insurance Company (“ASI”) and charged her for it, as specifically permitted under her loan agreement. The premium was more than twice what she had paid for her own policy and included a commission to Wachovia's insurance-agency affiliate, again as permitted under the loan agreement. Schilke calls the commission a “kickback.”

On behalf of herself and a class, Schilke sued Wachovia and ASI asserting multiple statutory and common-law claims for relief, most sounding in fraud or contract.¹ The district court dismissed the complaint in its entirety—and also rejected two attempted amendments—based on federal preemption and the filed-rate doctrine.

We affirm but on different grounds. The complaint and the proffered amendments do not state any viable claim for relief. The loan agreement and related disclosures and notices conclusively demonstrate that there was no deception at work. It was Schilke's responsibility to maintain hazard insurance on the property at all times; if she failed to do so, Wachovia had the right to secure the insurance itself and pass the cost on to her. Wachovia fully disclosed that lender-placed insurance may be significantly more expensive than her own policy and may include a fee or other compensation to the bank and its insurance-agency affiliate. In short, maintaining property insurance was Schilke's contractual obligation and she failed to fulfill it; because the consequences of that failure were clearly disclosed to her, none of her claims for relief can succeed.

I. Background

The following facts are from the complaint and its attachments and certain related notices and correspondence Wachovia submitted to the district court without objection from Schilke.² On or about March 22, 2006, Schilke purchased a townhouse and mortgaged it to her lender, World Savings Bank, FSB, which later merged with Wachovia. The loan agreement requires Schilke to maintain property insurance on her home:

5. BORROWER'S OBLIGATION TO MAINTAIN INSURANCE

At my sole cost and expense, I will obtain and maintain hazard insurance to cover all buildings and other improvements that now are or in the future will be located on the Property. The insurance must cover loss or damage caused by fire, hazards normally covered by “extended coverage” hazard insurance policies and other hazards for which Lender requires coverage. The insurance must be in the amounts and for the periods of time required by Lender. I may choose the insurance company but my choice is subject to Lender's approval. Lender may not refuse to approve my choice unless the refusal is reasonable. All of these insurance policies and renewals of the policies must include what is known as a Standard Mortgagee Clause to protect Lender. The form of all policies and renewals must be acceptable to Lender. Lender will have the right to hold the policies and renewals. If Lender requires, I will promptly give Lender all receipts of paid premiums and renewal notices that I receive.

....

If I am required by Lender to pay premiums for mortgage insurance, I will pay the premiums until the requirement for mortgage insurance ends according to my written agreement with Lender or according to law.

The agreement also authorizes the lender to purchase insurance on the property if the borrower fails to do so:

7. LENDER'S RIGHT TO PROTECT ITS RIGHTS IN THE PROPERTY

If ... I do not keep my promises and agreements made in this Security Instrument ..., then Lender may do and pay for whatever it deems reasonable or appropriate to protect the Lender's rights in the Property. Lender's actions may, without limitation, include ... purchasing insurance required under Paragraph 5 above (such insurance may cost more and provide less coverage than the insurance I might purchase).... Lender must give me notice before Lender may take any of these actions....

I will pay to Lender any amounts which Lender advances under this Paragraph 7 with interest.... I will pay those amounts to Lender when Lender sends me a notice requesting that I do so.

At the closing Schilke also signed a Notice of Fire/Hazard Insurance Requirements, which states as follows:

The terms of our loan documents require maintenance of continuous insurance coverage. If at any time during the life of the loan, a policy is cancelled or replaced or an insurance agent is substituted, we must receive written evidence of the insurance and written evidence of the substitution of the insurance agent. Written evidence of insurance is defined as: A COPY OF THE REINSTATEMENT NOTICE FOR THE CANCELLED POLICY OR A COPY OF THE REPLACEMENT POLICY—BINDERS ARE ACCEPTABLE IN THE STATES NOTED IN ITEM 7 ABOVE.

NOTE: If we do not receive such evidence prior to the termination date of the previous coverage, we may at our sole option, obtain an insurance policy for our benefit only, which would not protect your interest in the property or the contents. We would charge the premium due under such a policy to your loan and the loan payment would increase accordingly.

We may assess a processing fee and our affiliated insurance agent could collect a commission from the insurer. The cost for such insurance could be at least two to five times greater and provide you with less protection than insurance you could purchase directly from an insurer.

As relevant here, Schilke purchased insurance for her home in January 2008. On May 9, 2008, Wachovia sent a letter to Schilke noting that her policy had lapsed on April 8 and requesting proof of insurance coverage within 14 days. She did not respond.

On June 12, 2008, Wachovia sent another letter to Schilke again requesting proof of insurance and notifying her that it had acquired temporary insurance coverage—a “binder”—from ASI. Enclosed with this letter was a form entitled “Illinois Notice of Placement of Insurance” in which Wachovia described the binder and advised Schilke that she was responsible for the cost. This notice explained that the annual premium for the binder was $2,034 and that the insurance was backdated to April 8, the day her own insurance lapsed. Wachovia advised Schilke that if she provided proof of insurance, it would cancel the binder and refund any premiums paid by her. Finally, Wachovia warned Schilke that if she did not provide proof of insurance coverage within 30 days, it would replace the binder with a 12–month insurance policy and charge Schilke for the premium, which would likely be more expensive than her own coverage:

The premiums charged for this coverage are usually higher than the same coverage purchased directly by the customer. The higher rate for lender-placed insurance reflects limited insurance coverage and underwriting risk associated with this policy. The premium may include compensation to the insurer and Wachovia Mortgage for tracking customers' compliance with Wachovia Mortgage insurance requirements. The premium for such a policy will be $2,034.00 for a twelve-month policy. Your monthly mortgage payment will be adjusted to collect for the cost of the new coverage. You may avoid these costs by obtaining your own insurance, as required by Wachovia Mortgage, in a timely manner. Upon receipt of proof of acceptable coverage, this policy will be canceled. You will be charged only for the days that this policy was needed. Any unearned premium will be refunded on a pro-rata basis.

Schilke did not respond to this letter. On July 18, 2008, Wachovia again wrote to Schilke, this time informing her that it had secured a 12–month insurance policy on the mortgaged property through ASI at a cost of $2,034. Wachovia reiterated Schilke's option to secure her own insurance, stating that if she provided proof of insurance, the ASI premium would be refunded on a pro rata basis.

Schilke did not secure her own insurance. Instead, a year later she filed this class-action suit against Wachovia and ASI alleging, in substance, that their conduct was deceptive because they did not disclose that Wachovia was receiving “kickbacks” from ASI. The complaint asserted a claim under the Illinois Consumer Fraud and Deceptive Business Practices Act and claims for common-law fraud, conversion, and unjust enrichment.

Wachovia and ASI moved to dismiss under Rule 12(b)(6) for failure to state a claim, advancing a number of alternative grounds for dismissal. The district court granted the motion, holding that the statutory and common-law claims against Wachovia were preempted by regulations issued by the bank's federal regulator, the Office of Thrift Supervision. The court also held that the claims against ASI were barred by the filedrate doctrine, which precludes challenges to rates charged by public utilities and other...