SEPTEMBER 2006 BAD FAITH CASES MORTGAGE LENDER THAT REQUIRES HOMEBUYER TO FORWARD FUNDS TO PURCHASE DISASTER INSURANCE WITH MONTHLY PAYMENT NOT AN INSURER FOR BAD FAITH PURPOSES (Middle District)

In Lindsey v. Chase Home Finance, L.L.C., the United States District Court for the Middle District of Pennsylvania addressed whether a mortgage lender could be deemed an insurer under Pennsylvania’s Bad Faith Statute.  The lender required its borrowers to purchase disaster insurance.  This required paying an additional $10.90/month with the homeowner’s payment to Chase, which then had the insurance purchased from ACE.  Chase canceled the ACE policy in 2003, but still included the $10.90 in the monthly bills.  A flood occurred, and the homeowner claimed that she never received notice of the cancellation and had expected the disaster insurance to pay off her mortgage.  She demanded that Chase step into the carrier’s role, and brought an insurance bad faith claim against Chase, among other claims, when it refused.  The Court dismissed that claim, holding that the Bad Faith Statute, 42 Pa.C.S. § 8371, only applies to true insurance companies; citing to state and federal cases holding that self-insurers and insurance adjusters are not subject to the statute.  As the Court stated:  “The amended complaint does not aver any facts that Chase has agreed to assume certain risks, such as flood damage to the Property, in consideration for premiums; that Chase is licensed to conduct insurance business in Pennsylvania; that the Agreement was reviewed and approved by the state insurance regulator; or that Chase issued an insurance policy naming Ms. Lindsey as an insured.”

Date of Decision:  August 30, 2006

Lindsey v. Chase Home Finance, L.L.C., United States District Court for the Middle District of Pennsylvania, No. CV-06-1220, 2006 U.S. Dist. LEXIS 61893 (M.D.Pa. Aug. 30, 2006) (Vanaskie, C.J.)