Force-placed insurance is a policy that a lender places on a home or other property securing a loan in order to protect the lender’s interests. The lender selects the policy and coverage details but the borrower has to pay the premium. Force-placed insurance generally costs much more than a policy obtained on the open market, and may not protect the borrower as well or at all. If a borrower does not pay the force-placed insurance premium, the lender may be able to foreclose on the property.
A financial advisor can help you devise a risk management plan, including insurance to protect your assets.
Force-Placed Insurance Basics
When a lender provides mortgage financing to a homebuyer, the loan documents will require the buyer to maintain mortgage hazard insurance coverage on the home. This insurance protects the lender against loss in case the dwelling is destroyed by fire, flood or some other peril. Auto lenders also require similar insurance when they finance the purchase of an automobile.
If the buyer does not maintain adequate insurance, the lender has the right to obtain insurance protecting its interests and to require the buyer to pay the premium. This insurance is also called lender-placed insurance, creditor-placed or collateral protection insurance.
If a home is in a flood plain, the lender can also require flood insurance coverage and, if the homeowner doesn’t maintain it, force-placed flood insurance. If a homeowner does not pay the premium for the force-placed insurance, the lender can foreclose on the property.
Causes of Force-Placed Insurance
Most cases of force-placed insurance happen when borrowers do not include their hazard insurance premium in their mortgage payment. This may be intentional or through simple oversight. However, if premium payments are not made, the insurance company will eventually cancel the coverage.
An insurance company may also decline to renew the policy if the homeowner requested non-renewal or if the insurance company stops offering that particular policy. Sometimes a loan servicer may fail to make the payments on the insurance policy from the escrow account, resulting in the policy being canceled.
Another time a policy may be force-placed is if the lender is not identified as the beneficiary on the insurance policy. The same issue can arise if the wrong address is given for the lender.
Downsides of Force-Placed Insurance
Price is one big difference with force-placed insurance. The premium for a force-placed policy may be several times higher than one purchased on the open market. An insurance company charges a higher rate because it has not underwritten the policy using prior loss records or other underwriting tools. The rate may also be high because the lender is getting a sales commission from the insurance company for force-placing the policy.
Coverage is another way force-placed insurance differs from a regular homeowner’s policy. Force-placed insurance may not protect the homeowner at all. For instance, there may be no coverage for the home’s contents. Liability coverage is also likely to be lacking in force-placed insurance.
Getting Rid of Force-Placed Insurance
Force-placed insurance affects approximately 1% to 2% of borrowers. To avoid it, homeowners can make sure to pay hazard insurance premiums on time and in full. They can also check policy and loan documents to make sure the information is correct and they are following the lender’s requirements.
A lender is required to notify the owner before force-placing insurance. If this notice escapes attention, it should become obvious when the mortgage payment increases due to the addition of the force-placed insurance premium.
If force-placed insurance has gone into effect, a homeowner should continue making the payments while arranging for market-priced coverage. When new coverage is effect, proof of coverage can be sent to the lender. The lender is required to cancel the force-placed policy and refund any unused premiums to the homeowner.
The Bottom Line
Force-placed insurance covers a lender against loss of property securing the loan. A lender may force-placed insurance on a home or automobile if the borrower fails to maintain adequate coverage as specified in the loan documents, and require the borrower to pay the premiums. Force-placed insurance is usually much more expensive and may provide much less protection to the homeowner. The lender will require the homeowner to pay the premiums, however, until the lender gets proof that a new policy is in place. Otherwise, the lender may be able to foreclose on the property.
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