By now, most of our readers and many in the mortgage industry know that we have the largest federal false claims action in the U.S., HUD’s $2.4 billion case against Allied Home Mortgage and CEO Jim Hodge. We have proudly represented former Allied employees who didn’t get paid and the American taxpayers who the government says were fleeced for hundreds of millions of dollars. Naturally, we try to stay atop of all things Allied.  The latest news comes from London. Lloyds of London, to be exact. Several days ago the underwriters at Lloyds filed suit seeking to get out of paying claims on behalf of Allied (see the complaint).

According to the complaint, Lloyds says it should not be obligated to defend Allied in HUD’s fraud case because the policy excludes “deceptive trade practices” and because the fraud suit does not arise from Allied’s performance of professional services.

Since we are involved in the underlying lawsuit against Allied, we are unable to comment specifically on Lloyd’s suit. We can say, however, that insurance policies typically exclude claims of fraud from coverage. This is exactly what Lloyds says in its suit.

The complaint brought by the government against Allied and Hodge alleges that Allied “originated loans out of hundreds of branches never disclosed to HUD, submitted knowingly false statements to HUD concerning its branch operations and accumulating sanctions, and lied to conceal its dysfunctional operations from HUD.” In simple layman’s terms, it claims that Allied engaged in massive fraud.

Lloyds says it has no duty to defend Hodge nor to pay any claims arising out of the lawsuit based on the language in its policy. The complaint says they not only want to get released from defending the case they also want the defendants to pay back any money spent by the insurer for Allied’s legal bills to date.

The noose continues to tighten around Allied, Hodge and his henchmen.
Although Hodge has apparently started another mortgage company, its remains extremely unlikely that he could ever earn enough to pay all the claims against him and his companies.

Reading between the lines, the complaint suggests that Allied is funding its defense through insurance. If Lloyds is able to pull out, Allied will face a much tougher road ahead. While we sincerely believe that Allied has no defense and that the government holds the upper hand, having access to expensive lawyers often prolongs cases by years.