Forced Place Insurance

What is 'Forced Place Insurance'

Forced place insurance is the insurance that a lien holder places on a property, which provides coverage if the borrower allows coverage to lapse and does not secure a replacement policy. Forced place insurance is intended to ensure that the property remains insured, protecting both the homeowner and the lien holder. Forced place insurance can also be known as creditor-placed, lender-placed or collateral protection insurance.

BREAKING DOWN 'Forced Place Insurance'

Forced place insurance comes with costs which are paid upfront by the lien holder but are added to the balance of the lien. Force-placed insurance is frequently more expensive than a policy you might find when shopping for yourself.  Due to the relative ease of abuse resulting from forced place insurance, there are specific provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act that require forced place insurance to be "bona fide and reasonable."

Forced-placed insurers charge higher prices for the coverage they provide because they must cover every house they are presented with instead of simply choosing the lowest risk options for them. This increased risk results in the higher premium. However, there are some consumer advocates that say these higher prices are a result of price gouging or kickbacks to banks. Additionally, lender-placed insurance can offer much less coverage for th prices they charge than other policies. Force-placed policies only cover bank assets; they usually do not cover personal property or offer liability protection.  

Forced place insurance may be easy to abuse, especially if 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.

Example of Forced Place Insurance

A lender may force-place flood insurance on homes in flood zones that they believe do not have enough flood insurance to meet the legal minimum required to protect the property. If a consumer obtains a loan to buy a car, they must have insurance to cover the car. If they fail to obtain insurance or let their insurance lapse, the lender likely has the right under the sales contract to force-place insurance on the car.