The U.S. Department of Justice is cracking down on an Allstate-owned insurance company for allegedly forcing collateral protection insurance on hundreds of thousands of customers who already had their vehicles covered through other insurers.
In a new lawsuit, which was filed on July 24, the Justice Department accuses National General (NGHC) , which offers home and auto insurance, of engaging in a “scheme” that defrauded customers who financed their vehicles through Wells Fargo.
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The department alleges that between 2005 and 2016, National General schemed to obtain money from Wells Fargo by “force-placing” its collateral protection insurance on millions of cars, even though the company “knew or recklessly disregarded” that borrowers already had insurance.
“In fact, from 2008 to 2016, National General knew that it falsely force-placed insurance between 56 and 93% of the time,” reads the lawsuit. “These improper force-placements harmed borrowers — causing borrowers to pay money they did not owe, borrowers to default on their loans, vehicle repossessions, and negative impacts to borrowers’ credit scores.”
Consumers who financed vehicles through Wells Fargo at the time were required to have comprehensive and collision insurance, or collateral protection insurance. Wells Fargo contracted with National General to identify whether or not a customer had the required insurance for their vehicle.
A woman is handed car keys.
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“If National General did not obtain proof of such insurance, National General automatically issued a certificate of insurance for its CPI product,” reads the lawsuit. “This was called ‘force-placing’ insurance because the cost of the CPI was subsequently added to a borrower’s loan, even though the customer did not affirmatively purchase the insurance from National General.”
The Justice Department alleges that National General “made no phone calls to insurance carriers, agents or borrowers to obtain outside insurance information,” despite being required to do so. The company also allegedly “failed to match insurance information in its possession to financed vehicles.”
National General allegedly made huge profit from CPI placements
Wells Fargo customers paid about $1,100 per loan annually for National General’s collateral protection insurance, which was more expensive and provided less protection than comprehensive and collision insurance.
“Sometimes National General realized its error before the borrower was billed, but, between 29 and 63% of the time, National General improperly invoiced Wells Fargo who then improperly billed the borrowers—forcing borrowers to pay premiums and other fees associated with the CPI that they did not owe,” reads the lawsuit.
The lawsuit alleges that National General “falsely placed” between 1.2 million and 2.1 million collateral protection insurance between 2005 and 2016. While about 600,000 to 700,000 of these policies were canceled before the borrower was charged for it, about 640,000 to 1.4 million were not.
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Overall, National General earned over $500 million in premiums and other associated fees from collateral protection insurance placements during this time period, according to the lawsuit.
“National General knew or at least recklessly disregarded that it was falsely placing CPI and charging for duplicative insurance, but it took no meaningful steps to reduce the rate of false placements,” reads the lawsuit. “NGLS’s Wells Fargo Account Manager dismissed false placements as a ‘function of the program.’”
The Justice Department is seeking to have National General face the maximum penalty under the Financial Institutions Reform, Recovery, and Enforcement Act “in an amount to be determined at trial.”
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National General did not immediately respond to TheStreet’s request for comment.
The lawsuit from the Justice Department comes at a time when most consumers across the country are facing higher car insurance rates due to inflation and other factors.
According to a recent survey by Expertise.com, 49% of Americans believe that they are paying too much for car insurance. The survey also found that 40% claim that they shop for better rates every few years, while 22% said that they never look for better rates.
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