DEFINITION of 'Forced Place Insurance'

The insurance that a lien holder places on a property, to provide coverage in the event the borrower allows coverage to lapse. Forced place insurance is intended to ensure that the property remains insured, protecting both the homeowner and the lien holder. The costs associated with forced place insurance are paid upfront by the lien holder, but added to the balance of the lien. Due to the relative ease of abuse resulting from forced place insurance, there are specific provisions in the Dodd-Frank Act that require forced place insurance to be "bona fide and reasonable."

BREAKING DOWN 'Forced Place Insurance'

Forced place insurance has drawn insurance, because it is easy to abuse, particularly when the loan servicer owns the insurer. Loan servicers, for example, have been found to allow one policy to lapse only to replace it with another, more expensive policy. In these cases, the loan servicer could receive large cash incentives or kickbacks from the insurer, as compensation for giving it the policy. In addition, forced place insurance policies have been known to be back-dated, to collect for premiums for periods of time that have already passed.

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