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Updated March 13, 2019: A few months ago, I received an unwelcome surprise in the mail — a letter saying my landlord insurance had lapsed on a rental property I owned and that my lender had purchased more expensive homeowners insurance on my behalf.
This was a shock to me because my landlord policy hadn’t lapsed at all. I switched to a different policy with my existing company (Allstate) and changed some of the details, but there was no lapse in coverage. The worst part, however, was the fact that the new policy cost more than $1,100 while my existing landlord policy was only $503 for the year.
This is how force-placed insurance works. According to the New York Department of Financial Services, force-placed insurance can be placed by a lender or loan servicer on a home “when the property owners’ own insurance is canceled, has lapsed or is deemed insufficient and the borrower does not secure a replacement policy.” This insurance allows the lender or loan servicer to protect their own interests at your expense.
The National Association of Insurance Commissioners says force-placed insurance is allowed by most mortgages because lenders require borrowers to maintain “adequate homeowners insurance on their property.” In the case they do not maintain coverage, lenders can “force” insurance coverage on you.
Unfortunately, ethical issues arise with force-placed insurance. Lenders have no incentive to buy affordable coverage for you. The NAIC says some lenders have been accused of forcing prohibitively expensive coverage on homeowners to boost profits.
In the case of my rental property, the force-placed insurance was a mistake. I was properly insured the whole time, but my lender thought my policy had lapsed. Unfortunately, my lender didn’t contact me by mail until after the oversight had taken place and they had deducted the cost of force-placed insurance from my escrow account.
While I got stuck with force-placed insurance temporarily, I was lucky. Included in the letter my lender sent me was an email address where I could upload a current landlord policy and resolve the issue. I uploaded my existing policy the day I received the letter.
A few days later, I received a letter that said my lender canceled the force-placed insurance and refunded all but $9.88 of the policy price to my escrow account. I briefly considered calling to complain over the $9.88 charge but decided my time and mental bandwidth would be better spent elsewhere. (Learn how to change homeowners insurance through an escrow account.)
If you’re dealing with force-placed insurance purchased by mistake, the New York Department of Financial Services suggests handling it similarly to how I did.
“Even if you believe the servicer is at fault, you should continue to make payments to cover the force-placed insurance,” they write. “Gather detailed proof of the new insurance and send a copy of the relevant documents to your servicer. Request that they cancel the force-placed insurance policy they obtained for you as soon as possible.”
If the force-placed insurance was purchased on your behalf because your insurance did indeed lapse, they recommend contacting an insurance carrier and purchasing your own policy as soon as you can. You can also try to get your old policy reinstated.
Consumer Financial Protection Bureau regulations say once your lender receives proof of your own insurance policy, they have 15 days to cancel your force-placed insurance and refund the purchase price of the force-placed policy for any periods of overlapping coverage.
If you believe your policy was unlawfully canceled or you have a dispute, the New York Department of Finance suggests you send a Qualified Written Request to your lender. This is a formal letter suggested by the U.S. Department of Housing and Urban Development that can help you gather more information related to errors regarding your loan or force-placed insurance. You can see a sample of a Qualifed Written Request on the HUD website.
Whether you’re stuck with force-placed insurance due to an oversight or because your own policy lapsed, you have options. In the event of a mistake or error, you can provide proof of coverage and get the force-placed insurance canceled within 15 days. If your policy actually lapsed, you should start shopping for a new homeowners insurance policy right away or try to get back in good standing with your old one.
Dealing with force-placed insurance is never fun, which is why you should get it out of your life as quickly as you can.
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