What Is Force-Placed Insurance?
Lien holders will put force-placed insurance onto a mortgaged property in cases where the borrower allows the coverage they were required to purchase to lapse. Lapses may be due to non-payment of premium, filing false claims, or other reasons. Force-placed insurance will protect the property, the homeowner, and the lien holder. Future mortgage payments will reflect the added cost of the insurance.
Force-placed insurance is also known as creditor-placed, lender-placed, or collateral protection insurance.
How Force-Placed Insurance Works
Force-Placed insurance comes with costs that the lienholder pays upfront, but is added to the balance of the lien. Typically, this type of insurance is more expensive than a policy that could have been found by the homeowner. Providers of force-placed insurance will charge higher prices for the coverage because they are mandated to provide coverage, regardless of risk. Increased risk results in a higher premium.
Additionally, lender-placed insurance may offer less coverage for the price than other available homeowner's policies. The policy will cover only the amount due to the lender, which may not adequately protect the home in the case of a full or partial loss. Also, these policies usually do not include personal property or liability protection.
Abuse Inherent in Force-Placed Insurance System
Due to the relative ease of abuse resulting from the use of force-placed insurance, there are specific provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act that require its use to be "bona fide and reasonable."
In some cases, the loan servicer will also have an arm of the business which provides insurance. Uneducated or first-time buyers may not fully understand how to shop for insurance and will assume the lender-placed policy is the same or as-good-as any other product. Some lenders do not practice in the best interest of the borrow. Another tactic is for the lender to include back-dated premiums as they add the sum to the mortgage payment.
As an example, a lender may receive substantial cash incentives or kickbacks from the insurer, as compensation for giving it the policy. Some consumer advocates say the higher prices for force-placed insurance are a result of price gouging or kickbacks to unscrupulous lenders.
Reasons for Not Getting Homeowner's Coverage
- A homebuyer may find themselves paying for the higher premium, forced plan coverage if they delay, or miss the renewal period for their homeowner's insurance policy. Most homeowner's insurance has at least one-year term of coverage.
- If the location of a house is in a floodplain, sinkhole-prone, wildfire risk, or earthquake area, the owner may have problems finding a company that will underwrite the risk. Likewise, if the structure is in a high crime zone, insurance may be hard to come by.
- Owners who have filed previous fraudulent claims may also find it hard to locate a company to cover their property. Even if the claims submitted were valid when an owner files multiple claims, providers view them as too high of a risk.
- A poor credit score may also affect a person's ability to obtain homeowner's insurance. Companies are reluctant to take on the added risk of policyholders who have a history of defaulting.
- Homes that are old, or those structures which have not had general maintenance and upkeep done, are considered risky for insurers. Also, states such as Florida, have updated building codes which the building may no longer meet. If the structure has unrepaired damage, the insurer may refuse to cover the owner. Other red-flags are unpermitted additions.
- Finally, homeowners who own vicious pets or those who raise chickens or pigs may also receive a denial of coverage notice.