February 2008 capitol observations



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***BUSINESS LITIGATION
Travelers Settles Brokers’ Fees Claims
Travelers Companies, the commercial insurer, has reached an agreement with Attorneys General from several states to pay $6 million to resolve an investigation into fees it paid to brokers. Travelers also will settle a lawsuit by shareholders who said the company should have disclosed the fees. Terms of Travelers’ agreement with the nine states and the District of Columbia are subject to court approval.
The Florida settlement ends an investigation into accusations that Travelers paid the insurance broker Marsh & McLennan Companies to win business without the knowledge of clients. The investigation also examined whether Travelers had created the illusion of competition on insurance deals by submitting fake bids. In December 2006, Travelers reported that it had expected to end the payment of so-called contingent commissions in 2008. The insurer said it has made changes to the practices that got the company in trouble. Contingent commissions, paid to brokers based on how much coverage they sell, are not always known by insurance buyers at the time of a deal.
Marsh & McLennan, the Aon Corporation, and the Willis Group Holdings, the world’s three biggest insurance brokers, banned contingent commissions in 2004, giving up more than $1 billion in annual revenue to settle conflict-of-interest investigations by the New York Attorney General’s office. It was said at the time that the fees were tantamount to kickbacks, encouraging brokers to steer business to the most lucrative insurers. Marsh & McLennan settled in 2005 by agreeing to pay $850 million to customers across the United States. At least 11 insurers, including American International Group, have also reached settlements with regulators over the fees.
Source: Bloomberg News

Ex-Kodak Workers File Suit Against Morgan Stanley
A group of investors has filed a class action lawsuit and are asking for about half a billion dollars in damages from Morgan Stanley. It is alleged one of its brokers gave the investors bad advice to retire early and promised financial security that never materialized. The plaintiffs are all former employees of Eastman Kodak Co. in Rochester, New York. The lawsuit was filed in New York state court and it’s estimated that more than 1,000 people may be members of the class. The plaintiffs contend they wouldn’t have retired early, had their broker not told them they had enough money to do so and live comfortably. At least one contends that the broker, who has since retired, told her she would have even more money to spend once she was retired than she did when she was working.
The lawsuit alleges the broker assured the Kodak employees that they could expect to withdraw about 10% of their savings each year for the rest of their lives without depleting their principal. Three of the named plaintiffs retired in 1998 and the fourth retired in 2000. The amounts these four plaintiffs say they lost after they cashed out of their employer-sponsored retirement plans and put their money with Morgan Stanley range from $120,000 to $320,000. In addition to the class action lawsuit, an arbitration claim making similar allegations on behalf of another 16 former Kodak employees was filed at the Financial Industry Regulatory Authority's arbitration forum.
Source: Associated Press

Other Related Security Litigation Matters
In 2006 and 2007, the National Association of Securities Dealers -- one of FINRA's predecessors -- fined Securities America, a unit of Ameriprise Financial Inc., and Citigroup for sales pitches made by brokers to large groups of employees encouraging them to retire early. As is the custom, those firms neither admitted nor denied the charges that resulted in the settlement. Securities America was hit hard in arbitration for its broker's early-retirement pitches to longtime ExxonMobil Corp. employees. In 2006, an arbitration panel awarded $22 million to 32 former Exxon employees, which remains one of the largest arbitration awards ever handed down. I don’t believe we will see any slow down in securities litigation and arbitration during the rest of this year.
Source: Yahoo News


***INSURANCE AND FINANCE UPDATE
Insurance Profits Are Called Excessive By CFA
The Consumer Federation of America (CFA), a consumer advocacy group, reports that property and casualty insurers booked near-record profits last year, continuing a trend that has cost the average American household about $870 over the last four years in unnecessarily high premiums. For 2007, the companies that provide homeowners and auto coverage will make an estimated $65 billion after taxes, according to the consumer watchdog, not far below the 2006 level of $67.6 billion that represented their best showing ever. CFA, an umbrella organization based in the nation's capital, is a good source of information relating to the insurance industry. Robert Hunter, the Federation's director of insurance, says the profits are excessive. I agree with him.
The percentage of revenue paid to cover policyholders' claims has dropped during the last two decades, according to the report. Last year, the estimated "pure loss ratio" was 54.6%, compared to 66.6% in 1987. The CFA found that the insurance companies have so much available money, they are acquiring other businesses and launching "massive" stock buybacks. Not surprisingly, a good number of the companies gave their top executives substantial pay increases. Last year, the median pay package of insurance company chief executives was valued at $3.2 million, third highest among their counterparts in 21 industries, according to a recent analysis by The Conference Board, a New York-based business organization. When stock options and other forms of "non-cash" compensation are excluded, those insurance bosses ranked first, if the Conference Board figures are correct.
CFA wants state policymakers to look at a number of changes, including a ban on "unjustified geographic discrimination" and a requirement that private insurers provide an "all perils" homeowners policy offering flood and earthquake coverage. I believe insurance regulators at the state level must do a better job of keeping the insurers in line. States like Florida are working hard to protect persons and to make sure the companies are doing the right thing. But, weak regulation has been a major problem in many states. Alabama’s Insurance Department has made some progress over the past few years, but most observers believe the agency could do much better. A lack of funding and inadequate staffing have made the department’s job more difficult. I hope that will change, but don’t count on it. The CFA report gives a pretty good explanation of what all states are facing and offers some good recommendations.
Source: Mobile Press Register

Florida Bans Allstate Insurance From Writing New Business In State
A real fight is going on in Florida involving that state’s Insurance Commissioner and Allstate. Florida Insurance Commissioner Kevin McCarty suspended the certificate of authority of Allstate Companies to write new property insurance in Florida until the company fully complies with the subpoenas served last fall by his Office of Insurance Regulation (OIR). This decision by Commissioner McCarty follows his earlier action halting the scheduled two-day hearing into the Allstate Companies' reinsurance program, their relationships with risk modeling companies, insurance rating organizations, and insurance trade associations. Concerning his most recent action, the Commissioner stated:
In view of Allstate's ongoing, blatant disregard of our subpoenas, I have little choice but to take an action that will send a clear message about how seriously I am taking this issue. Suspending their certificate of authority to write new business in our state should make my point. If Allstate is willing to pay $25,000 per day in fines to a Missouri court for its ongoing failure to provide similar documents, it's obvious to me that it will take more than a monetary sanction to get them to comply with our subpoenas. It will be lifted when I am satisfied that we have received each and every document we need to properly investigate the important issues before us. It continues to trouble me that Allstate has not complied with our subpoenas and is not willing to explain to us their relationships with rating agencies, modeling companies and trade groups and how these relationships might have influenced the huge rate increases they have requested. This clearly cannot be in the best interests of Florida consumers.
Allstate was to have provided all appropriate company documents related to the above topics at or before the hearing last month, but failed to do so. Instead, the OIR received 51 pages of objections to the subpoenas. The suspension applies to Allstate Insurance Co., Allstate Indemnity Co., and Allstate Property and Casualty Co. Since it only suspends the companies from writing new business in Florida, existing policyholders will not be affected. Allstate must continue to service them and the companies must make all required statutory filings, including, but not limited to, audited annual financial statements, quarterly financial statements, and rate filings.
This is the first time the OIR has suspended a company for failure to "freely" provide documents as required by Florida law. Governor Crist, who fully backs the Commissioner in this matter, says he believes “Allstate is concealing something.” The Governor has this to say about the action taken involving Allstate:
I applaud Commissioner McCarty for sending a clear message to Allstate Companies and protecting Florida's consumers. It is clear to me that Allstate must have something to hide if they are unwilling to comply with the Commissioner's requests. This type of behavior is an unconscionable disregard for this process and their customers. I am grateful to Commissioner McCarty for taking this bold action today and look forward to further progress through the Senate Select Committee's work next month.
It’s good to see the State of Florida working hard for the Sunshine State’s citizens. If all states had the same type regulation, policyholders would be put on the same footing with the powerful insurance industry and that’s the way it should be. Interestingly, on January 18th an appellate court in Florida granted a stay of the order by IOR, which will allow Allstate to write new policies. I am told Florida officials will attempt to get the stay lifted and hopefully they will be successful Governor Crist and Commissioner McCarty are to be commended for their good work. Even if the court order stays in effect and the ban is lifted, it still sends a clear message to the insurance industry.

Source: Insurance Journal



Teenager Dies After Insurance Refuses Transplant
A recent story about how an insurance company refused to pay for a procedure that could have saved a young girl’s life is very sad. A 17-year old girl died just hours after her health insurance company reversed its decision not to pay for a liver transplant that her doctors said the girl needed. Nataline Sarkisyan, who died on December 20th at University of California, Los Angeles Medical Center, had been in a vegetative state for weeks. Her mother, Hilda Sarkisyan, believes "the insurance company is responsible” for her daughter’s death.
The teenager, who had been battling leukemia, received a bone marrow transplant from her brother. However, she developed a complication that caused her liver to fail. Doctors at UCLA determined she needed a transplant and sent a letter to CIGNA Healthcare on December 11th. The Philadelphia-based health insurance company denied payment for the transplant and the girl died. It was reported that about 150 teenagers and nurses protested outside CIGNA's office in Glendale, California. While the protesters were rallying, the company reversed its decision and said it would approve the transplant. Despite the reversal, CIGNA said in an e-mail statement before Nataline died that there was a lack of medical evidence showing the procedure would work in her case. That surely doesn’t appear to have been the case, based on what the doctors at UCLA had to say. Our firm handled a similar case several years ago after a health insurance company refused to approve a procedure that was needed by our client’s teenage son. We proved in that case that the insurance company was delaying its approval without any medical justification. In fact, we learned that the company believed the young boy would die during the delay and they could avoid paying for the needed procedure.
Source: Associated Press

FACTA Class Action Lawsuits Get Certified
In 2003, Congress enacted the Fair and Accurate Credit Transactions Act (FACTA) as part of the Fair Credit Reporting Act to protect consumers from the disclosure of personal and private credit card information by merchants who accept credit and debit cards. Specifically, the new FACTA law prohibits merchants from printing more than five digits of a customer’s card number and/or the expiration number on the receipt provided to the customer. All merchants in the United States had until December 4, 2006 to come into compliance with this law. Basically that entailed reconfiguring the cash register software that is responsible for printing customer receipts.
Many businesses adhered to this law and brought their equipment into compliance. But there are a number of companies that have failed to follow this law and continue to print more than five digits of a customer’ card number and/or the expiration date. This statute was enacted by Congress as part of the “war on terror” to protect U.S. citizens from having their private financial information exposed. It was clearly something that was needed.
There have been a number of consumer class actions filed against a variety of businesses, such as theatres, event ticket providers, department stores, restaurant chains, book stores and others, which have been certified by courts based on violations of FACTA. A few of the states in which these cases have been filed are Alabama, California, Michigan, Pennsylvania, and West Virginia. There are dozens of other similar cases filed in other areas of the country. Class certification of cases alleging violations of FACTA is a step in the right direction for protecting consumer rights. Businesses in this country were given three years to convert their systems and come into compliance with the provisions of FACTA. Failure to do so after nearly five years is clearly an intentional violation of the law, putting thousands of consumers at risk. Our firm with Jay Aughtman as the lead lawyer is handling a number of these lawsuits.

Judge Sanctions Texas Mutual
A state court judge in Texas has issued sanctions against Texas Mutual Insurance Company for committing a fraud on the court. Judge Martin Hoffman, who is in Dallas, says that the company "committed fraud” on his Court and the Defendant “by falsifying a critical medical record, and then using that record throughout discovery, depositions and trial." The court says Texas Mutual knew the record was false and ordered Texas Mutual to pay $30,000 in sanctions to the opposing party in the underlying case. The case involved a worker’s compensation claim that was originally handled by Texas Division of Workers' Compensation. After that decision, Texas Mutual sued the worker to get the benefits back and that’s when the fraud was said to have occurred.
Source: Claims Journal

More On Suits By Katrina Victims Against The Federal Government
The costs of rebuilding after Hurricane Katrina are so great that it’s almost impossible to grasp the magnitude of the overall effort. Many individuals, businesses, and governmental entities have filed claims seeking to recoup their losses. Since the August 29, 2005 hurricane, there have been 489,000 claims filed by victims against the federal government over damage caused by the failure of levees and flood walls. The U.S. Army Corps of Engineers reports receiving at least 247 claims for at least $1 billion each, including one claim for $3 quadrillion. I can’t even figure out how many zeros follow the 3. The Corp of Engineers’ list includes a $77 billion claim by the City of New Orleans. Fourteen of the filed claims involve a claim for wrongful death.
Fifteen of the claims were filed by businesses, including several insurance companies, which have suffered losses. Hurricane Katrina is blamed for more that 1,600 deaths along the Gulf Coast states of Louisiana and Mississippi and is considered the most destructive storm to ever hit the United States. Katrina caused at least $60 billion in insured losses and could cost Gulf Coast states up to $125 billion, according to the National Oceanic and Atmospheric Administration. The handling of post-Katrina by the Bush Administration and FEMA was a total disaster and will go down in history as an extreme and callous example of bureaucratic bungling.
Source: MSNBC

Group Of Claimants Settle 22 Katrina Cases With State Farm
State Farm Fire and Casualty Co. has agreed to settle another group of Katrina insurance claim cases. Under the settlement, 22 policyholder cases were resolved, with the terms being confidential. According to Chip Merlin, the lawyer for the policyholders, documents that State Farm had been ordered to produce in previous cases put his clients in a good negotiating position. In September, the Merlin law firm and State Farm settled 103 cases for policyholders. The documents and testimony from State Farm officials indicate the company decided against paying claims in areas hit by storm surge, relying on policy language to deny those claims without thorough investigations.
In cases where wind and water combined to cause a loss, the U.S. Court of Appeals for the Fifth Circuit has ruled policy language precludes coverage. However, that ruling doesn’t relieve insurance companies of their duty under Mississippi law to fully investigate the cause of a loss and pay for wind damage covered under an all-perils policy. State Farm maintains the company investigated each policyholder's claim and covered independent wind damage.
The information State Farm was forced to turn over in pretrial proceedings is covered by protective orders that seal certain insurance records from public view, including company e-mails about a "wind-water protocol" used internally to adjust claims. State Farm argues such records are "trade secrets." The protocol itself, however, has been made a public record. It certainly appears that the insurance records should be available to all policyholders.
Source: Sun Herald

Safety Insurance Company Fined Over Home Policy Non-renewals
The Massachusetts Attorney General has reached an agreement with Boston-based Safety Insurance Co. over allegations that the company violated the Massachusetts Consumer Protection Law by cancelling or non-renewing 31 consumer home insurance policies for insufficient reasons. Safety Insurance has agreed to pay $41,000 to the Attorney General's Local Consumer Aid Fund and change its practices. A consent judgment was filed in court by the parties, but it must be approved by the court before it becomes effective. Consumers are entitled under the Massachusetts statute to a clear explanation if their homeowner's insurance policy is going to be cancelled or non-renewed.
Attorney General ­­­Martha Coakley says the settlement represents another step toward “ensuring that Massachusetts consumers are treated appropriately under the law by their insurance companies." In some instances, Safety Insurance failed to provide specific reasons for the cancellation or non-renewal of insurance policies. In notices sent to homeowners, Safety Insurance offered vague reasons such as "underwriting guidelines" for its decisions. Under the terms of the settlement, Safety Insurance is required to send notices containing specific reasons for their cancellation and non-renewal decisions to consumers. This was a good result for citizens in Massachusetts.
Source: Insurance Journal


Murder Spree Found To Be A Single Event Under Homeowner’s Insurance Policy
The Pennsylvania Supreme Court has ruled that an insurance company can be required to defend policyholders accused of negligence in the aftermath of a deadly shooting spree carried out by the adult son of the policyholders. But, the court says the shooting spree that took five lives over several hours at various locations should be considered a single occurrence and not several under the policy issued by the Donegal Mutual Insurance Co. The court reasoned that the parents' alleged negligence was a single occurrence covered by the policy even though multiple deaths and injuries followed over a span of two hours and at different locations. There were obviously different victims. The policy had a $300,000 per occurrence limit.
The highest court in Pennsylvania agreed with a lower appellate court ruling that coverage under the homeowners insurance policy Donegal issued to the parents was triggered by the actions of their son. He was convicted of killing five people and leaving a sixth paralyzed during a shooting rampage in April of 2000. But, in its split decision, the high court differed with the lower courts on the single occurrence question. The trial judge and the state intermediate appeals court had ruled each shooting qualified as a separate occurrence, which could have exposed Donegal Mutual to as much as $1.8 million in payments to the estates of the victims.
Donegal Mutual had asked the courts to determine whether the multiple shootings qualified as an "accident" under its insurance policy. Donegal also sought to determine whether the alleged negligence of the parents and the subsequent shootings by their son constituted a single "occurrence" under the policy or whether each shooting of the victims qualified as a separate occurrence. The Supreme Court affirmed the decision that an "accident" happened, but reversed the lower court’s finding of multiple occurrences. The victims alleged that the parents’ negligence consisted of: a negligent failure to procure adequate mental health treatment for their son; failure to take their son's handgun away from him; and failure to notify police that he possessed a handgun.
Donegal argued that it had no duty to defend or indemnify either the son or his parents in the civil actions filed against them by plaintiffs because the shootings were not accidental, but were instead the result of intentional conduct not covered by the policy. The Supreme Court disagreed on the first issue, but agreed on the second. Thus the “accident” was covered, but all of the separate shootings amounted to a single accident. Frankly, I would see a bigger problem with the “accident” ruling rather than this being separate incidents.
Source: Insurance Journal

Credit Card Companies Lobby For Less Regulation

The entire economic stability of this country has been shaken to the core as a result of the subprime lending disaster. The financial services industry has plunged this country into the brink of economic collapse. Instead of taking responsibility for its role in creating this economic crisis, many of the powerful players in the banking community are concentrating their efforts to gain less government scrutiny over their actions. In their attempt to avoid regulation, the industry has partnered with the American Bankers Association, the leading bank trade association, and has released a highly suspect study arguing against any form of regulation of credit cards. The industry argues that any regulation of credit card practices will only hurt consumers in the end. The approach pushed by the industry says problems in the consumer credit market can be solved through improved disclosure, consumer financial literacy education, and consolidated regulatory oversight for unfair and deceptive practices. That’s absolutely unworkable with strong and effective regulation and control by the federal and state governments.


Because the use of credit cards has become so pervasive in the modern economy, consumer financing of their spending habits now exhorts a greater degree of influence on the United States’ economic stability than ever before. Credit card debt impacts savings rates, bankruptcy filings, inflation, and consumer purchasing power. Credit card usage is like printing additional money, but it is outside of the control of the government. In this regard, increased card usage creates an inflationary pressure on the economy. The more credit available in the economy, the faster inflation rises, with effects felt by all. Similarly, when individuals are forced into bankruptcy and foreclosure, we all pay the cost of failed credit deals. Such vital aspects of our economy and security cannot escape governmental regulation and be left to the whim of the banks. Many of the worst economic and employment abuses this country has seen inflicted on its citizens have been during times when the government failed to regulate powerful corporations that were focused solely on their own well being.
The banking community has apparently seen the handwriting on the wall. It’s very clear that the public has grown tired of the rampant abuses in the credit card industry and the adverse effect it has had on American families and economic stability. There is a strong ground swell of support for something positive to be done in this area of concern to protect consumers. As we try to survive the subprime lending crisis this country is experiencing, let’s hope that any momentum gained can be sustained and that thousands of working families can get the much needed relief and protection the deserve.
Source: Adam J. Levitin. All But Accurate: A critique of the American Bankers Association Study of Credit Card Regulation. 2007.

Jury Award Against State Farm Upheld On Appeal
A Missouri appeals court has upheld an $8 million punitive damages judgment returned against State Farm Insurance Company. The case involved a lawsuit filed by two plaintiffs who accused State Farm of malicious prosecution and breach of contract. The case began a decade ago when one of the plaintiffs reported the theft of her Toyota 4Runner, which was found abandoned and burned. State Farm declined to pay her $10,000 claim and, working through an industry investigative service, referred the case to prosecutors, who charged the two plaintiffs with insurance fraud. After a jury acquitted them in 2001, the two filed the civil action against State Farm.
In September 2005, the jury awarded the plaintiffs each $400,000. Later that year, a judge adjusted those amounts to $250,000 because of a statutory damages cap, and he also assessed the punitive awards. State Farm appealed. The Court of Appeals for the Western District of Missouri upheld the judge’s actions. State Farm says a further appeal is being considered. James Frickleton, a lawyer from Leawood, Kansas­­­­­, represented the plaintiffs in this case and did an excellent job.
Source: The Kansas City Star

TRIA Extension Is Approved
President Bush has signed legislation into law that reauthorizes the Terrorism Risk Insurance Act for seven years. The Act was set to expire at the end of 2007. Some key provisions of the Terrorism Risk Insurance Program Reauthorization Act of 2007 include extending the current program for seven years; eliminating the distinction between foreign and domestic terrorism; and requiring the U.S. General Accountability Office to conduct two studies. One study addresses the issue of providing terrorist insurance coverage for nuclear, biological, chemical or radiological events and how best to expand such coverage. The other study — to be completed in six months — examines the issue of high-risk areas in the United States that are faced with unique capacity constraints. The bill also makes adjustments to the current mandatory recoupment requirements of the TRIA program through the use of accelerated policyholder surcharges during the first four years of the seven-year extension. It certainly appears that this reauthorization of the Act was needed.
Source: Insurance Journal
***PREDATORY LENDING
Lender Lobbying Contributed To The Nation’s Mortgage Mess
Much has been written and said about the problems caused to homeowners who took out high interest mortgages they couldn’t afford. I don’t want to beat a dead horse, but the impact of the problems, are so great it can’t be ignored. It has been widely reported that foreclosures are now at an all-time high. It was also reported that late payments in January were at a record pace. During the housing boom, the subprime industry succeeded at more than just writing mortgages. The industry’s lobbyists also defeated efforts by some states to control risky lending to borrowers with questionable credit. Ameriquest Mortgage Co., until recently one of the nation's largest subprime lenders, and certainly one of the worst offenders, was at the center of those battles. Working with powerful Washington lobbyists, Ameriquest paid out more than $20 million in political donations. The lobbyists for the lenders successfully beat back efforts in New Jersey and Georgia to weaken tough new laws. In turn, those victories helped stall efforts other states to crack down on reckless lending. As reported, home loans made by Ameriquest and other subprime lenders are defaulting now in large numbers. As a result, global credit markets are now in deep trouble.
The Bush Administration, regulators and lawmakers should have anticipated the problems and then taken action to protect homeowners and the good lenders. Instead, they collectively sat on their hands and did absolutely nothing. But, the subprime industry worked hard to defeat legislation that certainly would have contained some of the damage. Of course, Ameriquest wasn’t the only company that lobbied heavily against state lending restrictions. Other subprime lenders and banking trade groups, including Citigroup Inc., Wells Fargo & Co., Countrywide Financial Corp., and the Mortgage Bankers Association, spent big bucks on lobbying and political giving. For example, from 2002 through 2006, Ameriquest, its executives and their spouses and business associates donated at least $20.5 million to state and federal political groups, according to the Wall Street Journal. In comparison, over the same time period, Countrywide Financial, once a large subprime lender, gave about $2 million in campaign gifts. The company also spent an additional $6.7 million lobbying in Washington. Ameriquest also was very active at the state level. A number of state legislatures were attempting to crack down on predatory lending and very little – if anything – was accomplished.
It doesn’t take a fiscal expert to figure out that federal lawmakers haven’t been a threat to the subprime industry in recent years. Not surprisingly, members of Congress received at least $645,000 in donations from Ameriquest and large sums from other big subprime lenders. While a number of bills were introduced that would have provided new oversight of the industry, thus far no action was taken. Unfortunately, all of the serious efforts at the state level to deal with predatory lenders were defeated. The intense lobbying efforts and huge sums of campaign money were directly responsible for the wins by the subprime lenders and banks. Sadly, homeowners and consumers generally had no powerful lobbyists working for them. Consumer groups like Public Citizen tried hard to get the attention of the Bush Administration, but their efforts fall on deaf ears. Now our nation’s economy is in deep trouble and President Bush is acting like he has just discovered that we have a serious economic crisis in our country.
Source: Wall Street Journal

Mortgage Lenders Ordered To Pay $99 Million In Punitive Damages
A state court jury in Jackson County, Missouri, ordered three mortgage lenders to pay $99 million in punitive damages to Missouri residents who were charged illegal fees for second mortgages. The jury, which had assessed $5.1 million in actual damages against the three companies in the first phase of the trial, awarded the punitive damages in the second phase. Collectively, the awards are among the highest assessed by a Jackson County jury in recent years in a commercial case. The mortgage companies — Residential Funding Co. LLC, Household Finance Corp. III and Wachovia Equity Servicing LLC — bought second mortgage loans from a lender that had charged excessive interest and illegal origination, loan discount, underwriting, processing, document preparation, and legal fees under Missouri’s Second Mortgage Loan Act. It was proved that the companies knew of the lender’s fraudulent conduct and “stepped into its shoes.”
Missouri’s Second Mortgage Act limits the types and amounts of fees that can be charged in connection with high-interest second mortgage loans. The defendants claimed that they were entitled to rely on the originating lender’s assurance that its loans fully complied with state law. The originating lender, Mortgage Capital Resource Corp. of California, is no longer in business. Its former chief executive was sentenced last year to 57 months in prison for mortgage fraud and ordered to repay banks $9.27 million.
Residential Funding, which is owned by GMAC Mortgage Group, was ordered to pay $4.33 million in actual damages and $92 million in punitive damages. The jury also ordered Household Finance to pay $420,489 in actual damages and $4.5 million in punitive damages. Wachovia Equity Servicing was ordered to pay $374,957 in actual damages and $2.5 million in punitive damages. The case was filed in 2003.
The case had been certified as a class action. Other Missouri residents who obtained second mortgages from Mortgage Capital Resource will be eligible to share in the damage awards. It is estimated that a total of 324 Missourians will qualify as members of the plaintiff class. J. Michael Vaughan of Walters Bender Strohbehn & Vaughan, in Kansas City, Missouri, was the lawyer who represented the plaintiffs. Lawyers for Residential Funding Co. say an appeal is likely.
Source: The Kansas City Star

Lender Has Apparently Committed Frauds On The Courts
A number of federal bankruptcy judges have called into question the fraudulent business practices of Countrywide Financial Corp. As you may know, Bank of America Corp. is buying the mortgage lender. Bankruptcy courts in several locations have found Countrywide to be guilty of actual frauds on their customers and also on the courts. The U.S. Trustee Program, a division of the Justice Department that oversees the bankruptcy system, has been investigating the company's handling of loan payments and court claims in cases across the country. There are also inquiries from the Securities and Exchange Commission and several state Attorneys General. Shareholder lawsuits tied to Countrywide's financial decline and other class action and individual suits brought by borrowers for alleged abuses by the company should have Bank of America to be very concerned over its acquisition.
Source: New York Times and Wall Street Journal

Lawsuit Claims Wells Fargo Preyed On Poor
The City of Baltimore, Maryland has filed a federal lawsuit against Wells Fargo over the subprime mortgage fallout. The suit claims the bank acted as a predatory lender in the city's poorest neighborhoods, leading to foreclosure rates that nearly double the city-wide average. Baltimore wants to recoup costs of maintaining the predominantly black neighborhoods reeling from the foreclosures. The foreclosures were said to destabilize the communities and decrease tax revenue. The cost of the foreclosures is estimated to be in the tens of millions. The lawsuit alleges the San Francisco, California-based bank targeted black neighborhoods and engaged in deceptive lending practices, such as tacking on fees and surcharges to low-cost homes. Wells Fargo claims it doesn't "tolerate illegal discrimination against, or unfair treatment of, any consumer."
Source: Associated Press

Cleveland Sues Banks Over Foreclosures
In a similar undertaking, the City of Cleveland, Ohio, has sued 21 banks and claimed their subprime lending practices created a public nuisance that hurt property values and city tax collections. The lawsuit, filed in Ohio state court, seeks to recover hundreds of millions of dollars in damages, including lost taxes from devalued property and money spent demolishing and boarding up thousands of abandoned houses. Cleveland Mayor Frank Jackson says that the buying and selling of high-interest mortgages by some of the nation's biggest banks devastated city neighborhoods struggling to recover after the loss of manufacturing jobs. The mayor wants to hold accountable those who are responsible for the mess they helped create. Cleveland based its legal challenge on a state law that relates to public nuisances.
The list of defendants includes Bank of America Corp. and Countrywide Financial, which will be bought by Bank of America. The acquisition will make Charlotte, N.C.-based Bank of America the nation's biggest mortgage lender and loan servicer. Deutsche Bank Trust Co. and Wells Fargo & Co. were named in the suit as foreclosing the largest number of homes over the past four years in Cleveland and surrounding Cuyahoga County. Deutsche Bank Trust was estimated to have 4,750 foreclosures in that period, and Wells Fargo had roughly 4,000.
Ohio Attorney General Marc Dann also is considering filing a state lawsuit against investment banks. If filed, it probably wouldn't be submitted as a public nuisance case. A report commissioned last November by the U.S. Conference of Mayors projected that 361 metropolitan areas would take an economic hit of $166 billion in 2008 because of the rise in foreclosures.
Source: Associated Press

MGIC Claims Could Reach $2 Billion
MGIC Investment Corp., the nation's largest mortgage insurance company, will pay losses amounting to $2 billion this year. The Milwaukee-based company had said payouts could be as high as $1.5 billion in 2008, but it has now raised that to a range of $1.8 billion to $2 billion. New delinquencies and growing claim sizes were cited as the reason for the increase. Homebuyers typically must have mortgage insurance when they put down less than 20% of their home's value. When borrowers miss payments, as more have been doing, the insurers pay lenders. If homes end up in foreclosure, lenders and insurers lose money. By the end of 2007, MGIC said it had 107,120 delinquent loans, an increase of about 16,000 delinquencies from the end of the third quarter.
At the end of 2007, MGIC had $211.7 billion in insurance in force. The company said fewer homes that were delinquent are resuming payments, so there are now a higher percentage of delinquent loans that become claims, which are rising in size. It’s being reported that MGIC paid $586 million in claims through the first part of November. The company predicted then it would wind up paying $875 million for 2007. A final figure will be released with earnings this month. Payouts were $611 million in 2006. MGIC has said it would limit coverage for borrowers with poor credit and higher risk loans. The company will charge more for some loans in soft markets like Florida and California.
Source: Insurance Journal
***PREMISES LIABILITY UPDATE

Tiger Attack Exposes Oversight Weakness At The Nation's Zoos
Most folks generally don’t consider animals at a zoo to be a safety risk for patrons visiting the facilities. But when you consider that dangerous animals are confined at zoos, it becomes obvious that safety of patrons should take a high priority by owners and operators of the zoos. A recent incident at a California zoo has resulted in a renewed look at zoo safety. It has been widely reported that a tiger that escaped its San Francisco Zoo pen on Christmas Day killed a San Jose teenager. This incident exposed alarming gaps in oversight - both at this zoo and at other locations and that’s a reason for concern. It appears the 350-pound tiger’s pen walls at the zoo were well short of industry standard. The weak mix of regulations and professional standards that governs the nation's zoos has been put in focus by this tragedy. A system that rests on overwhelmed federal inspectors enforcing vague animal welfare laws – and industry standards that are only voluntary – needs to be improved.
San Francisco Zoo officials contend industry inspectors, who reviewed the zoo's practices and facilities three years ago, never cited concerns about the tiger pen. But, these officials also have acknowledged that their own records overstated the height of its walls by 5 feet. A wall that’s only 12 ½ feet high is not adequate. On the other hand, some zoos are accredited by the Association of Zoos and Aquariums, a non-profit organization based in Maryland. The Association of Zoos and Aquariums (AZA) enclosure guidelines are not compulsory. The oversight of the nation's zoos are a shared obligation of federal and local government.
The U.S. Department of Agriculture's Animal and Plant Health Inspection Service has the primary responsibility to regulate zoos and other animal exhibitors as part of the Animal Welfare Act. The agency can charge exhibitors with violations of the Act that can lead to license revocation or fines up to $3,750 a day. But the federal Act deals more with humane treatment than it does with public safety. For example, it doesn't specify caging dimensions for animals, whether they are tigers or rabbits, according to a USDA spokesman. Instead, it provides general guidelines for the comfort, safety and security of animals.
Currently, the federal agency has only about 100 inspectors, and that number is grossly inadequate. Critics say those inspectors are overwhelmed with the responsibility for regulating more than 200 accredited zoos, thousands of roadside attractions, circuses, and other private animal exhibitors. Each institution is inspected at least every two years. In cases of repeat violators, there are as many as four inspections a year. Zoos are required to keep a copy of their most recent inspection report. Those like San Francisco Zoo that house dangerous animals need an emergency response plan for dealing with escapes and disasters. Federal inspectors are now investigating the deadly escape at the San Francisco. The zoo, which has four other tigers, has plans to add fencing, surveillance cameras, and electrified wiring to fortify the enclosure.
The AZA offers zoos and aquariums accreditation through a days-long review every five years by a committee of three or four volunteer curators, keepers, and veterinarians from member organizations. Inspectors review everything from governing structure, financial health, staffing levels, record keeping, and safety protocols to the condition of buildings and enclosures, animal acquisition and disposal practices and educational programming. Many believe the system falls short when it comes to safety issues. Nevertheless, the AZA does set some standards, which include holding and exhibit enclosure design.
Enclosure guidelines, written in 1994, recommend against barred cages in favor of "naturalistic fenced and moated exhibits." The recommendations specify that moats should be a minimum of 23 feet wide with a wall at least 16.4 feet high on the visitors' side. Walls are to be sheer and unclimbable. The AZA said the Christmas incident in San Francisco marked the first escape leading to the death of a visitor among the organization's accredited zoos. It has been reported that the tiger had been taunted, became agitated, and they went on the attack. But, regardless of why the tiger in this case attacked, the fact is the animal was able to get out of what should have been a secure part of the zoo and attack a patron.
Sources: Mercury News and Associated Press

Child Awarded $2.85 Million In Escalator Injury
A Worcester, Massachusetts, teenager, whose hand was mangled by an escalator when he was younger, has been awarded $2.85 million dollars in damages in his lawsuit. Thirteen-year-old Kevin Lou has had five surgeries on his right hand since the accident occurred while he visited his grandmother in China at age 4. The accident happened after his hand slipped through a gap between the escalator and its side panels. A jury awarded the damages to the young man in his family's suit against Otis Elevator Co., the escalator manufacturer. The jury also awarded the boy’s parents $250,000 each. Otis will likely appeal. The young man can't grasp objects because of the accident. His father will use some of the money awarded for surgery to improve the function of his son's hand.
Source: Insurance Journal

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