Bank of America Corp.'s lawsuit against MGIC Investment Corp. reflects escalating tensions in the industry over mortgage insurers' denials of claims that lenders submit for defaulted home loans.

In a complaint filed in the Superior Court of California for San Francisco , BofA alleged that MGIC is denying "millions of dollars in valid mortgage insurance claims" the lender has submitted. A spokeswoman for BofA would not elaborate on the dollar amount of claims in dispute.

MGIC said in a Securities and Exchange Commission (SEC) filing that it would "vigorously" defend itself against BofA's suit. A spokesman for MGIC said the Milwaukee company would not discuss the matter further.

Rhonda Orin , a Washington-based partner at the law firm Anderson Kill & Olick , which specializes in representing policyholders, said it "seems inevitable" that lenders would resort to litigation to fight insurance rescissions, given the financial stakes.

"Everyone is looking for financial relief from this situation and insurance is one place to look and the insurance companies are saying, 'Look elsewhere,' " said Orin, who is not involved in the BofA suit.

"Lenders have been trying to handle it without full-blown litigation" so far, she said, by seeking intervention from state insurance commissioners and negotiating directly with insurers.

But "there's been an increase in inquiries from lenders to us about what their options are," she said.

BofA alleged that MGIC "has adopted unreasonable interpretations of its mortgage insurance policy language to justify its failure to pay claims" because of steep losses during the downturn.

The Charlotte banking company asked the court to determine the appropriate interpretation of terms of its policies with MGIC.

Among other things, BofA said, MGIC has improperly taken the position that the lender must prove it was not aware of an alleged borrower misrepresentation to avoid rescission of a policy.

With its purchase of Countrywide Financial Corp. last year, the $1.7 trillion-asset BofA became the largest residential lender and servicer.

The suit was filed last week and received little attention until MGIC disclosed it in the SEC filing Tuesday night. On Wednesday, MGIC shares fell 9.4%, to $5.76 a share.

In a report published this month, Moody's Investors Service said that private mortgage insurers had rejected 20% to 25% of claims in recent quarters, compared with a long-term average of about 7%.

MGIC, the largest mortgage insurer by policies in force, is no exception to the trend. In its third-quarter financial report, filed in November, it reported that it had denied 20%-22% of claims during the nine months through March, compared with 12.7% in the first quarter of 2008.

But while MGIC said it continued "to have discussions with lenders regarding their objections to rescissions that in the aggregate are material," it was not then "involved in arbitration or judicial proceedings regarding a material amount of" them.

Though they are a defensive measure, rescissions could presage another trouble spot for mortgage insurers, which have been struggling to survive amid the severest housing downturn since the Great Depression.

In its third-quarter filing, MGIC said that it had performed contract underwriting on a large amount of mortgages that it had insured, and that ultimately claims against it for poor quality work could be substantial.

"The rescission of mortgage insurance coverage on loans on which we also provided contract underwriting services makes a claim for a contract underwriting remedy more likely to occur," the company said.

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