Force-placed insurance is a home insurance policy that a lender or loan servicer places on a borrower’s property. Mortgage providers may do this if they find that the homeowner no longer has an active insurance policy or if they believe that the homeowner’s insurance does not adequately protect the property. This article explains what force-placed insurance is and the impact it can have on borrowers.
Written by Todd Carney, J.D. Harvard Law 2021.
Updated October 12, 2021
Taking out an insurance policy is crucial to protect your home. While homeowners typically purchase insurance for their own home, sometimes the lender will purchase insurance on a borrower’s behalf. This is called force-place insurance.
Lenders or loan servicers can take out a force-placed home insurance policy when the homeowner’s own insurance coverage has lapsed or when the homeowner’s insurance provides less coverage than the lender requires. Force-place insurance is expensive. Its primary function is to protect the lender’s interest in the property. When the lender buys force-placed insurance, they pay for it by charging the borrower more for their mortgage payments.
Mortgage providers have been using force-placed insurance more recently than they did in the past. This has caused insurance regulators to review how mortgage lenders and insurers are using force-placed insurance.
This article explains what force-placed insurance is and the impact it can have on borrowers.
What Is Force-Placed Insurance?
Force-placed insurance is a home insurance policy that a lender or loan servicer places on a borrower’s property. Mortgage providers may do this if they find that the homeowner no longer has an active insurance policy or if they believe that the homeowner’s insurance does not adequately protect the property. This is sometimes called lender-placed insurance, creditor-placed insurance, or collateral protection insurance. Under federal law, a lender has to notify a homeowner at least 45 days before purchasing force-placed insurance.
When you take out a mortgage, you don’t own your property outright. The lender has an interest in the property, which is why mortgage contacts require borrowers to carry a homeowners insurance policy to protect their home. Not having this insurance can cause you to default on your mortgage. The mortgage loan documents also typically state that if the homeowner’s insurance policy lapses or the homeowner cancels the policy, the lender has the right to force place an insurance policy and pay for it by charging the homeowner more on their mortgage payment.
Premiums Are Higher
Typically, the premiums for lender-placed insurance are a lot higher than the insurance premiums for personal policies. Despite this, force-placed insurance usually covers a lot less than the insurance borrowers purchase to protect their homes. It’s there mostly to protect the lender. Because of this, force-placed insurance doesn’t provide liability coverage or cover personal items. Instead, it generally just covers what’s left to pay on the mortgage loan.
If the homeowner does have insurance or doesn’t pay the force-placed insurance premium, then they could end up defaulting on their mortgage loan, which gives the lender the right to foreclose.
Why Would a Lender Add Collateral Protection Insurance?
Sometimes a lender or loan servicer may also take out hazard insurance on the property. They may do this if:
There’s no homeowners insurance policy on the real estate either because the borrower didn’t purchase a policy or they didn’t renew their insurance or to take out another policy.
The lender doesn’t have proof of insurance from the borrower, despite the fact that the homeowner does have insurance coverage.
The homeowner has a policy, but the lender considers the kind or amount of coverage insufficient.
The property is subject to extreme risks like flooding or earthquakes, and the homeowner can’t find an insurance agent who will cover them.
The homeowner has filed several past insurance claims (fraudulent or valid) and can’t get an insurer to cover them. In this case, the lender may then add collateral protection insurance.
The borrower has a low credit score, so insurance companies aren’t unwilling to provide coverage.
The home or structures on the property are old and haven’t been kept up to date, so insurance companies deem them to be too risky.
The property owners have vicious animals or keep livestock, and this prevents them from getting insurance coverage.
Lender-Placed Insurance Is Becoming More Common
Since lender-placed insurance has become more common recently, many state regulators have begun looking into it. Regulators are investigating if mortgage companies and insurers are profiting from this practice. Some state regulators are investigating on their own, and others are working as part of an initiative of the National Association of Insurance Commissioners (NAIC)
If your lender or loan servicer incorrectly purchases lender-placed insurance to cover your home, you should send them a notice of error. If you don’t hear back from them, then you should contact an attorney. It is also helpful to file a complaint with the Consumer Financial Protection Bureau.
Mortgage companies have implemented force-placed insurance more during the last few years. Lenders can take out this kind of policy when the borrower’s personal property insurance has lapsed or if it doesn’t provide coverage that meets the lender’s requirements.
Force-placed insurance costs more than personal homeowners insurance policies, and it also covers less. The mortgage company pays for lender-placed insurance by adding it to the borrower’s mortgage payment. Given the increased use of this insurance, regulators are looking into its impact.