Mortgage lenders require borrowers to carry insurance on their properties. They do this so they will be repaid if fire, windstorm, or some other disaster damages the property. If the borrower does not comply, the lender has the right to buy a policy and pass the cost on to the borrower. This is known as “force-placed insurance”.
Some of the reasons why a lender would force-place insurance include:
- The borrower fails to buy a policy.
- The borrower’s policy cancels for non-payment of premium.
- The lender rejects the insurer from whom the borrower bought a policy. It might do this due to concerns about the insurer’s ability to pay claims.
- The borrower’s policy does not meet the lender’s requirements. The lender will require a certain amount of insurance deductible covered causes of loss and policy terms and conditions.
- The property is in an area with a high risk of flooding. The lender may believe the borrower’s flood insurance policy does not meet minimum requirements.
Force-placed insurance is undesirable for the borrower. First, it provides less coverage than would the borrower’s own policy. A homeowner’s policy covers:
- The building.
- Other structures on the grounds, such as fences.
- The homeowner’s belongings.
- The increased cost of temporarily living elsewhere after a loss.
- The homeowner’s legal liability for injuries and damage to others.
A force-placed policy will cover only the building.
Second, the borrower will pay more for it. The monthly mortgage payments will increase. This can create significant hardship, possibly causing the borrower to fall behind on the mortgage.
Federal law requires the lender to give the borrower notice before force-placing coverage. The notice must explain:
- The mortgage requires the borrower to carry insurance on the building.
- The lender does not have proof of the required coverage.
- How the borrower can provide proof of coverage.
- The lender may force-place coverage if the borrower fails to provide proof of coverage.
The law also requires the lender to send a second notice 30 days or more after the first one. The borrower then has 15 days to provide proof of insurance. After that, the lender may force-place coverage.
The borrower does not have to accept the force-placed policy. He should send a copy of the lender’s notice to his insurance agent and follow up with a phone call. He should continue to follow up with the agent until the issue is resolved. If he provides evidence of satisfactory coverage, the lender must cancel the force-placed policy and refund any unearned premium. Also, if the borrower had satisfactory insurance, and the lender starts foreclosure proceedings, the borrower can challenge the duplicate charges.
In recent years, some borrowers have claimed that lenders treated them unfairly. For example, a policy might have canceled because the lender failed to pay the premium on the borrower’s behalf. As a result, some states have put in place new restrictions on lenders.
Nevertheless, homeowners can avoid this situation. If they work closely with a professional insurance agent to obtain the right coverage, force-placed coverage will never come up.