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Consumer Credit Regulation: 6.5.5.2 McCarran-Ferguson Act’s Impact on Antitrust, Other Challenges to Credit Insurance Practices

The McCarran-Ferguson Act377 provides that a state insurance law can displace the application of the three major federal antitrust statutes to insurance practices—the Clayton Act, the Sherman Act, and the FTC Act. Every state, generally at the behest of the insurance industry, has enacted a state unfair insurance practices act in an attempt to specifically supplant these antitrust statutes.

Consumer Credit Regulation: 6.5.6 Banking Holding Act and Regulation Y

The insurance-related activities of banks and bank holding companies are subject to the requirements of the Bank Holding Company Act and Regulation Y.396 The Act prohibits tying credit to the purchase of credit insurance from the bank, holding company, or an affiliate.397 It also limits the right of regulated banks and bank holding companies to underwrite insurance to those circumstances where the underwriter’s performance could “reasonably be expected to produce benefits to the public.”

Consumer Credit Regulation: 6.5.7 Proving Coercion

Creditors today rarely openly admit that they require credit insurance. Most credit documents include a boilerplate insurance authorization containing the TILA disclosure that life and disability is not required, and that there is a choice of providers if property insurance is required. However, a signature on such an authorization is not the end of the analysis.

Consumer Credit Regulation: 6.6.1.1 Introduction

There are at least three ways in which a creditor can overcharge for credit insurance. One is to charge a premium rate higher than that permitted by law or regulation.429 Another is to purchase an amount of insurance coverage in excess of that allowable under the law or necessary to protect the loan. Finally, a level life policy may be sold where a decreasing life policy is required.

Consumer Credit Regulation: 6.6.1.2 Credit Life

The statute, regulation, or other administrative ruling establishing the approved rates for credit life insurance will usually couch the rate in terms of the cost per $100 of the obligation per year—for instance, 65¢/$100/year. This provides that the rate is 65 cents per year for every $100 owed. The insurance is usually written to insure the total of payments on a closed-end loan, which includes both the anticipated interest and the insurance premiums themselves.

Consumer Credit Regulation: 6.6.1.3 Credit Accident and Health

Approved rates for credit accident and health, also called credit disability insurance, are generally derived from estimates as to what rate will result in a specified target loss ratio.443 There are different kinds of disability coverage: retroactive and non-retroactive, as well as seven-, fourteen-, or thirty-day waiting or elimination periods,444 each with its own approved rate.

Consumer Credit Regulation: 6.6.1.4 Credit Personal Property Insurance

Credit personal property insurance generally is not subject to rate regulation in any state. However, the borrower may have purchased excess coverage,448 which could give rise to an overcharge claim. It may be a simple matter to determine the amount of coverage by referring to the certificate of property insurance. However, if the certificate of insurance is unavailable, or if it does not contain the amount of coverage, the practitioner may have to try to calculate the amount of coverage sold.

Consumer Credit Regulation: 6.6.2.2 Creditor Compensation As Interest

A number of early cases considered whether credit insurance premiums constituted usury under state small loan acts. As phrased in the Uniform Small Loan Law:

In addition to the interest herein provided for, no further or other charge or amount for any examination, service, brokerage, expense, fee, or bonus or otherwise shall be directly or indirectly charged, contracted for, or received.475

Consumer Credit Regulation: 6.6.3.2 Amount of Coverage

Courts have long recognized that usury may exist when lenders charge borrowers for coverage in an amount “greater than the amount of the loan with a purpose of increasing the proportion of charges to the amount of money lent.”499 Some regulations similarly restrict credit life and disability coverage to the amount and term of the indebtedness.500 This limitation is found in both the credit insurance codes,501 and often in the special credit regulat

Consumer Credit Regulation: 6.6.4.1 Scope of Insurable Interest

Excess credit personal property insurance may be manifested in a number of different ways. The creditor may sell it in transactions where it is not permitted by law; it may sell coverage for an amount greater than the collateral (or the debt) is worth; it may insure property which is not collateral; it may add additional types of coverage beyond that which is authorized or necessary; or it may insure a phantom risk.

Consumer Credit Regulation: 6.6.4.2 Phantom Coverage

Excess coverage may also be argued in situations where the coverage buys illusory benefits. This may occur, for example, in connection with open-end accounts, where the account balance reflects nondurable purchases, such as lunches at the department store restaurant, tune-ups at the auto center, or cosmetics.

Consumer Credit Regulation: 6.7.1 Overview

Insurance packing refers to increasing a consumer’s debt by padding or “packing” the amount financed through the sale of expensive, unnecessary, and often unwanted products, such as credit insurance.527 A number of claims can be raised to challenge packing practices: usury, UDAP, breach of fiduciary duty, and RICO.

Consumer Credit Regulation: 6.7.2 Packing to Exceed Critical Statutory Thresholds

The primary motivation for credit insurance packing is increased profits through the sale of additional profitable products. One of the more subtle mechanisms by which insurance packing can maximize profits is if the creditor stretches a loan’s term, since the cost of the insurance premiums increases with the term of the loan. Consider the following actual fact situation:528 a customer wished to borrow approximately $1,400, and informed the lender she could afford a $75 per month payment.

Consumer Credit Regulation: 6.7.3 Packing with Sales of Non-Credit Insurance and Other Ancillary Products

Some creditors pack into loans non-credit insurance, club memberships, and similar fee-generating extras. Creditors profit from these sales and often have set employee quotas for inclusion of the products. The insurance packing practices of ITT Financial a number of years ago provides an example. Debtors would request a loan in a specified amount. The lender would telephone back that the loan plus optional insurance had been approved with a stated monthly payment, never mentioning the total loan amount.

Consumer Credit Regulation: 6.7.4 Unnecessary Collateral, Duplicative Insurance

Another feature of packed loans may be unnecessary collateral taken as security in order to write profitable credit property insurance. A creditor may, for example, take a superfluous non-purchase-money security interest in the borrower’s old car which has little or no market value, and write property insurance for it into the loan. The most common example of unnecessary collateral is household goods, despite the legal restrictions on a creditor’s right to take household goods as security.

Consumer Credit Regulation: 6.7.5 Non-Filing Insurance

Ordinarily, a creditor taking a security interest in personal property files a record of its security interest in a county recorder’s office as a means of protecting its interest in the collateral against other creditors.555 However, sometimes creditors find it easier to purchase non-filing insurance than to perfect the security interest.

Consumer Credit Regulation: 6.8.1 Sale of Insurance to Borrowers Unlikely to Benefit

Credit insurance may be sold to borrowers who are ineligible for the insurance coverage under the terms of the policies that they buy. Unlike ordinary insurance sales, creditors may not ask borrowers for information, such as medical histories, relating to their eligibility for benefits under credit insurance policies.565 Only after a claim is filed are eligibility factors such as health, age, and employment checked to see if grounds exist for denying coverage.

Consumer Credit Regulation: 6.8.2 Incomplete Coverage

A credit insurance abuse involves the sale of coverage represented to be full but is only partial coverage. As consumer loan balances grow larger, and terms longer, creditors may sell credit insurance which does not completely insure the loan. For example, a ten-year, $10,000 policy may be sold in connection with a fifteen-year, $15,000 loan. If the benefits of such a policy are misrepresented as being full coverage, the consumer should have a UDAP or a common law fraud claim.580

Consumer Credit Regulation: 6.8.3.1 Types of Improper Denial of Coverage

There are any number of reasons why a credit insurance claim will be improperly denied. The consumer’s pre-existing medical condition may be a disqualification and the creditor knew of the condition (or should have known) but does not inform the insurer.583 The creditor may simply not inquire about relevant facts, such as health. In some cases, there is no instruction from the insurer to do so. On occasion, the creditor deliberately misstates information on the insurance application.

Consumer Credit Regulation: 6.8.3.2 Theories to Recover From the Insurer

Where the consumer’s insurance claim is denied, any resulting litigation must decide whether to sue the creditor-seller, or the insurance company, or both. Legal claims leading to liability may differ depending on the defendant. This section examines theories of recovery against the insurer and the next against the creditor.

Consumer Credit Regulation: 6.8.3.3 Theories to Recover From the Creditor

Fraud claims against a creditor may be appropriate in challenging the denial of benefits.604 Knowingly selling credit insurance to a borrower unlikely to be eligible for benefits has been found to be fraudulent under Alabama law.605 Another case raises the question of whether selling excessive insurance coverage may be fraudulent.

Consumer Credit Regulation: 6.9 Surpluses, Secondary Beneficiaries

Because the purpose of credit life insurance is to protect the account from default if the borrower dies, the named primary beneficiary will be the creditor. However, any surplus should be distributed to a secondary beneficiary, such as the borrower’s heirs. While there are no reliable data, many people question whether insurance companies actually distribute any surplus to a secondary beneficiary.

Consumer Credit Regulation: 6.10.1 The Requirement of a Rebate

Upon prepayment, refinancing, or default leading to cancellation of insurance, the unearned portion of the premium must be rebated.630 At the outset of any litigation, ensure that insurers retain information regarding policy termination dates so that subsequent review of rebate issues is possible.631