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Prior to taking out a mortgage on a home, your lender will require that you get homeowners insurance to secure their investment in the property. If at any point your insurance is canceled, lapses, or is determined to be insufficient and you don’t secure a replacement policy, your bank or mortgage servicer may acquire force-placed insurance, also known as “creditor-placed” or “lender-placed” insurance, on your behalf. State and federal insurance laws give lenders the ability to buy insurance for the borrower if they’re not able to maintain coverage on the home.
Force-placed insurance is typically more expensive and has more limited coverage compared to standard homeowners insurance. Since your lender is only concerned with covering the rebuild value of your home, force-placed coverage usually doesn’t include protection for your personal belongings or personal liability, according to the National Association of Insurance Commissioners (NAIC). It is not considered a viable replacement for a standard homeowners insurance policy.
Forced-place insurance has also drawn the ire of borrowers and insurance regulators in recent years, according to the NAIC. The controversy stems around how much is being charged for lender-placed insurance and whether insurers and mortgage servicers are making excess profits off of the inflated cost of coverage. Lenders aren’t motivated to select the lowest price policy for borrowers, which makes the force-placed insurance system rife with abuse.
Before taking out a home mortgage, your lender will require you to get homeowners insurance
If your policy lapses or is canceled for any reason and you fail to get the policy reinstated or replaced, your lender may purchase coverage on your behalf
Force-placed insurance is more expensive and has more limited coverage compared to standard homeowners insurance
As the lienholder, your mortgage company has a financial interest in making sure that your home is adequately protected against damage from fire, windstorms, and other perils that could cause damage to your home. In order to secure their investment in the property, mortgage lenders will require you to have enough homeowners insurance to cover a full rebuild of the property. Lenders may also require flood insurance if your home is located in a high-risk flood zone.
If your insurance is canceled for any reason, or your policy lapses because of unpaid premiums, or if you have insufficient coverage on the home, your lender can “force” their own insurance policy on the property.
With force-placed insurance, the lender pays the policy premiums up front and the balance is then added to your monthly mortgage bill. If you pay for property taxes, mortgage insurance and homeowners insurance through your escrow account, your lender will likely streamline your payments from there. Keep in mind that your monthly mortgage payment could increase significantly once your lender places insurance on your property.
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Force-placed insurance costs around one-and-a-half to two times as much as a standard homeowners insurance policy, according to Assurant, a leading writer of lender-placed insurance policies. The National Consumer Law Center says lender-placed insurance can be up to ten times as expensive as regular homeowners insurance.
Lender-placed policies cost more because homes generally aren’t held to the same underwriting criteria as voluntary home insurance. Most force-placed insurance companies have an agreement with partnering mortgage companies to insure every lapsed property without conducting an inspection or analyzing the loss history of the home. Additionally, many homes are uninsured specifically because they’re located in natural disaster-susceptible areas where affordable insurance is scarce.
Lender-placed insurance is significantly pricier than insurance a borrower can purchase on their own, however the coverage itself is far worse. Policies are geared toward protecting the lender’s investment, so any personal belongings of the borrower, meaning clothes, furniture, jewelry, and electronics, aren’t covered by a lender-placed policy. Furthermore, lender-placed insurance doesn’t include personal liability coverage, a crucial component in a standard policy.
If your lender places force-placed insurance on your property, contact your loan officer or mortgage servicer right away and see what you need to do to get your old policy reinstated. It’s possible that your lender placed insurance on your home by mistake, but even if that’s the case you should continue paying the policy premiums until the situation is resolved.
Once you have a new policy, or if you already had a policy and the force-placed coverage was purchased by mistake, gather all necessary documents, like a home insurance binder or declarations page, to send to your lender as proof that your home is covered. Once your lender has proof of adequate coverage on the home, they’re legally required by the Consumer Financial Protection Bureau to cancel your force-placed insurance within 15 days and refund any unused premiums.
It can take anywhere from minutes to a few days to buy a homeowners insurance policy. Your homeowners application can take a couple days to process, and your insurer might require a home inspection.