Force-Placed Insurance: Who Pays?

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Also known as lender-placed, creditor-placed or collateral protection insurance, force-placed insurance is a topic that not many people know much about. Even so, it’s an important concept to understand, because if you end up with force-placed insurance, you’re going to feel it where it really hurts: your wallet.

When a homeowner lets their property hazard insurance coverage lapse, for whatever reason, the mortgager has the right to obtain insurance coverage in order to protect their interests in the property. Lenders can also obtain a force-placed insurance policy if the amount of coverage held by the homeowner doesn’t meet their requirements.

Some struggling property owners let their homeowner’s insurance policies lapse due to inadequate funds. They figure that it is more important to stay current on their mortgage bill and utility bills, for example. They may even believe that homeowner’s insurance is “optional.” Believe it or not, this line of thinking is pretty common. Very few people realize that by choosing to stop paying for property insurance, they’re making a very unwise and surprisingly costly decision.

Force-placed insurance is quite expensive, and your lender will most assuredly obtain coverage at your expense. The cost will either be tacked onto your monthly mortgage payment or you’ll be billed separately.

What can I do if I’m in this situation?

Getting insurance coverage on your own is a WHOLE LOT cheaper than having force-placed insurance. Even if it seems like you simply cannot afford insurance coverage on top of all of your other monthly bills and expenses, you’ll be much worse off if you’re stuck paying for an insurance policy that is picked blindly by your lender. You have the power to negotiate with insurance companies in order to secure the coverage that you need and want for a price that you can afford. You can also comparison shop your options before selecting the best insurance company for your budget. Your lender will not waste time looking around for the lowest price, and insurance companies know that they won’t, which is precisely why force-placed insurance policies are so expensive.

As soon as your lender has acquired a policy for your property, you’ll start receiving bills for the insurance payments, or the amount will simply be added to your loan payment each month. To add insult to injury, not only will you be paying more, but the coverage provided by force-placed insurance is typically less than the average homeowner’s policy. As the force-placed insurance is there to protect the lender and their interests in your property, none of your personal items will be protected, and you likely will not have liability coverage (for any instances wherein you or someone else sustain(s) injury or death inside the home or property).

Luckily, the Consumer Protection Act requires lenders to send two official written notices, at least 30 days apart, to you before any of this happens. Your lender can “force place” homeowner’s insurance coverage of their choosing if you don’t provide them with proof of property insurance with 15 days of receiving the second notice.  As soon as you can obtain an insurance policy of your own, your force-placed coverage plan will cease. You (or your attorney) need only call your lender and fax them a copy of your new policy for the force-placed policy to become null and void.

At times, the high cost of force-placed insurance can push already strapped homeowners into foreclosure. If this is the case for you, there are things you can do to stop the foreclosure, get back on track with your own homeowner’s insurance policy and keep your home. By working with an experienced foreclosure defense attorney, you won’t have to lose your home, and you’ll have homeowner’s insurance that you can afford!

 

Image credit: David Hilowitz

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One Response to Force-Placed Insurance: Who Pays?

  1. This is such an important issue to understand. I had a client whose mortgagor acquired insurance on her behalf. She kept making her mortgage payments as usual, but with the higher insurance rate, her monthly payments were no longer adequate to cover both the mortgage and the forced insurance. As a result the bank foreclosed and she is now in a huge mess. I wish she would have read this post about 2 years ago!

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