A lawsuit filed in federal court in Manhattan, and ajudge’s recent ruling prompted by that suit, is further raising thefinancial stakes for insurance carriers who provided force-placedcoverage for mortgage servicers during the housing bust and itsaftermath.

The New York class action suit was filed against GMAC and itsinsurer, Balboa, now a unit of QBE.

First, U.S. District Court Judge Alison Nathan in theSouthern District of New York, rejected efforts by GMAC andBalboa to bar Racketeer Influenced and Corrupt Organizations(RICO) Act claims in the lawsuit. The ruling means carriersand mortgage servicers could be subject to triple damages.

Second, the grounds for the suit could make it easier to file anationwide class action lawsuit. And, third, it bars defendantsfrom claiming rates imposed through force-placed insurance(FPI) were legal because they were approved by states--acommon defense in the lawsuits.

The latest suit is different in several ways from a flockof lawsuits in Florida, the FPI capital of the world, according tolawyers who are now dealing with class action lawsuits against 6major mortgage services over FPI provided by insurers duringthe recent housing bust.

Moreover, industry lawyers, who have filed cases in Californiaand Florida, as well as New York, acknowledged that the rulings inFlorida and New York are consistent in that courts are now viewingFPI arrangements harshly, by rejecting various defense theories andgiving plaintiff’s lawyers leverage over settlement talks.

Besides facing triple damages under RICO, the case will not facethe same class certification problems as the multi-state casesbased on state law. Specifically, a multi-state case based on statelaw, as are the Florida cases, are difficult to certify as classaction because insurance laws are different in every state.

Mark A. Strauss, lead lawyer in the NYC case at Kirby McInerneyLLP in New York, said, “We're very pleased with the court'swell-reasoned opinion, and will be vigorously prosecuting the caseon behalf of the borrowers victimized by this scheme. RICO isa powerful statute that provides for treble damages."

Force-placed insurance is purchased by a lender or servicer ifthe borrower allows the homeowners policy to lapse. Banks andinsurance companies had been hoping to protect themselves fromforce-placed lawsuits based on what is known as the filed-ratedoctrine, which prevents plaintiffs from claiming ratesapproved by regulators are not fair.

The lawsuit argues that GMAC and Balboa “devised and carried outa scheme to defraud borrowers and loan owners by overcharging themfor FPI” by which Balboa and and other defendants paid GMAC secretrebates, “i.e., kickbacks, camouflaged through complex transactionsusing affiliates and related parties.”

The suit charges that GMAC “pockets the rebates for itself,while fraudulently billing borrowers based on the full purportedprice of the FPI. In other words, the rebates reduce GMACM’s FPIcosts, but those savings are not passed through to borrowers," thesuit said.

Because the amounts supposedly paid by GMAC for FPI constituteservicing advances, “loan owners bear the inflated charges throughreduced loan proceeds and higher loss severities to the extentborrowers fail to pay,” the suit alleged.

Additionally, the suit alleges, the policies do not cover thepersonal property of the borrower or provide other coveragecommonly associated with homeowners’ insurance. “Only the interestsof GMAC are insured and protected,” the suit said.

The suit said the so-called “kickback scheme” was devised at theinception of the parties’ relationship in 2003, and has beencarried out continuously to the present.

Reacting to the lawsuit, consumer advocate Birny Birnbaum,executive director of the Center for Economic Justicein Austin, said “The New York court got it exactly rightin its ruling that the filed-rate doctrine does not protect thecharges a mortgage servicer makes to a borrower, but only thepremium charges from an insurer to the mortgage servicer.”

“We hope that the Consumer Financial Protection Bureau reviewsthis ruling and revises its mortgage servicing rule to betterprotect borrowers from paying for kickbacks from force-placedinsurers to mortgage servicers,” he added.