The Filed Rate Doctrine and “Secondarily Billed” RatesOn October 10, 2013 by Schnader in schnaderfsb.com
By Stephen A. Fogdall and Christopher A. Reese
The filed rate doctrine holds that the reasonableness of insurance rates filed with and approved by a state insurance regulator cannot be challenged in court. That doctrine ought to apply even when the cost of the insurance is passed on, or “secondarily billed,” by the insured to its own customers. After all, if the rate itself is reasonable (as the filed rate doctrine holds), then it should not cease to be reasonable simply because it is passed on to someone else.
However, a judge in the United States District Court for the Southern District of New York recently held that the filed rate doctrine does not apply to secondarily billed rates.
The case, Rothstein v. GMAC Mortgage, LLC, is one of many involving force-placed hazard insurance. Under the terms of most home mortgage loans, a borrower is required to maintain hazard insurance on the mortgaged property. If the borrower allows the policy to lapse, the lender typically has the right to purchase such insurance at the borrowers’ expense.
A spate of cases has been filed in the last few years alleging various improprieties in connection with force-placed insurance, including that the lender wrongly purchased backdated coverage, or that it purchased more coverage than it needed to, or that the insurer paid kickbacks to the lender as an inducement to purchase the insurance. The plaintiffs in the Rothstein case made allegations like this, asserting claims under RICO and the Real Estate Settlement Procedures Act.
The defendants in Rothstein moved to dismiss the plaintiffs’ claims in part on the grounds that they were challenging the reasonableness of the rates the insurer charged for the force-placed insurance. Because these rates were approved by state regulators, the defendants argued that the filed rate doctrine barred the plaintiffs’ claims.
The court rejected this argument. Although the insurer’s rates were filed with and approved by insurance regulators, the insurer did not charge those rates directly to the plaintiffs. Instead, the insurer charged the lender, who passed the cost on to the plaintiffs. The court held that this “secondary billing” of the rates defeated the filed rate doctrine.
The motivation for such a “secondary billing” exception to the filed rate doctrine is less than clear. The filed rate doctrine is based on the principle that courts should not second guess the reasonableness of rates approved by an expert administrative agency. That rationale is not diminished simply because the insured has passed on the cost to its customers. Moreover, if the insured does not pass the cost of the insurance directly on to its customers, it presumably will have to charge more for some other service or product to make up the difference. That outcome does not appear to be any better for the customers, yet that is precisely the result the court’s ruling in Rothstein incentivizes.