A federal court has denied motions to dismiss a lawsuit in which borrowers claim that loan servicers mismanaged insurance coverage that an originator had assured them would be sufficient—but ultimately was not.
The case centers on wind damage to a home that occurred after loan origination. The plaintiffs allege that two successive servicers failed to notify them of inadequate insurance coverage, with one allegedly taking excessive actions to remedy the issue.
The lawsuit seeks to hold servicers responsible for managing escrowed insurance payments at a time when homeowners' coverage is
Pennymac, which allegedly force-placed insurance on the home after it was "a total loss" and increased the plaintiffs' mortgage payment "beyond their means," had sought on a motion to dismiss due to its view the adequacy of coverage was the borrowers' responsibility.
"The subject deed of trust specifically states it was the plaintiffs' obligation to secure property insurance," the company said in case.
Pennymac also noted it "did not even begin servicing the loan until after the effective date of the insurance policy."
Caliber had also filed a motion to dismiss "for lack of sufficient factual support" and based on its limited involvement with the loan. It serviced the loan between 2018 and 2019, before wind damage in 2020 and after origination. (
Judge Henry Wingate of the Southern District of Mississippi allowed the case against both servicers to move forward, noting "Mississippi law recognizes claims for fraud, negligent misrepresentation, breach of contract, and bad faith in insurance disputes."
He acknowledged Caliber was not involved in origination, the original policy or coverage during the period when there was wind damage, but said the company had a "good faith" duty under state law to plaintiffs who represented that they believed their home was adequately insured.
Wingate said the court had subject matter jurisdiction over state law in the case because federal court involvement is warranted in legal disputes where parties are from disparate locations and the amount at stake exceeds $75,000.
(Plaintiffs originally filed the case in state court. Pennymac had it moved to federal court. The homeowners have called for the lawsuit to be remanded back to state court. That request remains pending.)
Wingate specifically referenced a case called Griffin v. HSBC in allowing the lawsuit against the servicers to proceed.
"Courts have held that servicers may be held liable if they negligently manage escrow accounts, particularly when they continue to pay for inadequate insurance policies," the judge said in his order. "Plaintiffs have alleged sufficient facts to raise questions regarding whether Caliber had a duty to notify them of any deficiencies in the policy."
Pennymac and the originator, Community Bank of Mississippi, did not immediately have any additional responses to the latest developments in the lawsuit available at deadline.
Court records indicate Community Bank of Mississippi's role in the case was terminated as of March 21.
