Surprise! You're the Owner of a Very Expensive Homeowners Policy

Homeowners insurance is a necessity. It protects your home and possessions as well as satisfies your lender's insurance requirements. If you fail to maintain insurance, or even fall below the required coverage levels, your lender just may step in and put a policy in place, a very expensive policy.

Why Do I Suddenly Have a Very Expensive Lender-Placed Policy?

Every mortgage ever written requires the homeowner to carry a specific amount of homeowners insurance on the property. If you don’t carry the proper amount of coverage or let your home insurance lapse, you could be the owner of a brand new, very expensive homeowners policy, courtesy of your lender.

Letting a policy lapse simply means that the policy is no longer in force so there is no insurance on your home. Borrowers can let a policy lapse for a variety of reasons: failure to pay their premiums, a cancellation by their insurer, or even a simple oversight.

If you allow your policy to lapse or if your mortgage lender decides you are carrying an insufficient amount of insurance, your lender has a legal right (read the fine print of your mortgage) to purchase a homeowners insurance policy and bill you for it. This ensures that their asset is protected in the event it is damaged or destroyed.

This type of policy is called “lender-placed insurance.” It is also called “credit-placed insurance” or “forced-placed,” and regardless of the name, it is very costly.

The added cost varies, but it can run four to 10 times the cost of a normal homeowners insurance policy. Currently, the average homeowners premium in the U.S. is $952, which means that you could suddenly be looking at an annual insurance bill of $3,808, and if you don’t pay up, foreclosure could be the next stop.

Forced-placed insurers defend the high cost of the coverage by claiming that they have to insure every house they are presented with rather than choosing the least risky options. Increased risk equates to a higher premium, according to lender-placed insurance companies.

Consumer advocates claim the prices are so high due to price gouging, reverse competition, and kickbacks going to banks, but we will get into all of that shortly.

In addition to the high cost, lender-placed insurance offers much less coverage. These policies offer zero coverage for your personal property and most lack liability protection as well. A force-placed policy only protects the bank’s asset, your home.

What Can I Do About Lender-Placed Insurance?

If your policy has lapsed and your lender has forced-placed a policy on your home, most likely the premium amount will be added to your mortgage payment.

First and foremost, pay the premium. While it may seem unfair and extremely expensive, failure to pay for the new policy can be grounds for your lender to start a foreclosure, which could end up with you losing your house.

Second, immediately contact your insurer or a new one if necessary to obtain a new policy on your home. If the home insurance lapse is due to an oversight or error, ask them to immediately reinstate your policy and send you proof of coverage.

If you let your policy expire or it was cancelled, finding coverage as soon as possible is extremely important. While you will most likely pay more for coverage than your previous policy (insurers do not like gaps in coverage or cancelled policies), you should be able to find coverage that is much less expensive than a forced-placed policy.

Once you have a policy in place, pull together detailed proof of your new policy and send copies to your mortgage provider with a request that they cancel the force-placed insurance and refund any duplicate coverage costs.

The charges for forced-placed insurance should stop as soon as you provide proof of coverage. If the charges don’t stop or duplicate coverage charges are not refunded, contact the insurance department in your state to explore your options or file a complaint. 

Consumers Are Fighting Back

Consumers have less-than-positive feelings about lender-placed insurance. Lawyers (as well as regulators) have taken notice, which has led to a number of class-action lawsuits.

Regulators have a number of problems with forced-placed policies, but a big issue is “reverse competition.” Consumers are being forced to pay the premium on a policy selected by their lender, and since the lender has no motivation to hunt down the lowest-priced policy, this drives up prices for everyone.

Kickbacks, commissions, or “revenue sharing,” as banks like to call it, are also an issue, although recent regulations have started to curtail this practice. Mortgage lenders were collecting payments from insurers when they used them for forced-placed policies, which hardly promotes the idea that they would look for the best price.

In some cases, the shenanigans went even further. In one case, Bank of America was purchasing forced-placed insurance from its own subsidiary. All of these less-than-honest practices generated huge income for banks and mortgage lenders, with premiums generated from forced-place policies hitting $5.5 billion in 2010.

Class action suits have led to changes and big payouts for consumers. Wells Fargo, U.S. Bank, J.P. Morgan, Citigroup and Assurant (a major forced-placed insurance provider) have all paid out settlements in the hundreds of millions of dollars.

Regulators got involved as well, passing the Dodd-Frank Wall Street Reform and Consumer Protection Act, which went into effect in 2014. It requires lenders to meet certain notification requirements before they can set up forced-place insurance for homeowners. It also requires lenders to keep an existing insurance policy in place if the borrower has an escrow account from which the mortgage servicer can pay the insurance bill.

Avoiding Forced Placed Insurance Is Always the Best Policy

There are a number of things you can do to avoid a forced-placed policy. Here are a few tips to keep your policy both affordable and with an insurer of your choice:

• Read your insurance policy and understand exactly what your coverage requirements are and the consequences if your coverage lapses.
• Always pay your insurance bill on time.
• Set up an automatic payment to avoid accidental missed payments.
• If you cannot afford your coverage, contact your insurance company to see if you can work out a payment plan, lower your coverage levels or raise your deductible to make the policy more affordable.
• Review your monthly mortgage statement for unexpected charges.
• If your insurance lapses, immediately contact your insurer to get it reinstated; the faster you act, the better your odds of reinstatement at your current rate.
• Keep an eye out for any notices from your lender or insurer regarding your coverage requirements or impending forced-placed insurance.

It’s possible that your coverage requirements will change over time. If flood maps are altered, you may need to add a flood policy to your insurance portfolio. If the insurance requirements for your home change, immediately purchase the required coverage, or you could end up with a forced-placed flood policy that is shockingly expensive.

Finally, be aware of the notification requirements that lenders must meet before they can put a lender-placed policy in force. According to the Dodd-Frank Act, a loan servicer must send notice to a homeowner before forced-placed insurance can be ordered. The notification must warn the homeowner that:

• They have an obligation to maintain hazard insurance on their property.
• The loan servicer does not have current proof of insurance coverage on file.
• The homeowner must follow the specified procedures to provide evidence of existing coverage.
• If the borrower is unable to provide proof of insurance coverage, the servicer may purchase forced-place insurance on the home.

A loan servicing company is required to send a second written notice to a homeowner at least 30 days after mailing the first notice. If you don’t provide proof of insurance to your loan company within 15 days after the second notice, they can purchase forced-place insurance on your home.

Immediately respond to any notices you receive. It could end up saving you a fortune in forced-placed insurance premiums.