Why Force Placed Insurance Could End Up Displacing Homeowners
Millions of individuals own home insurance, usually because their lender requires them to purchase coverage that will protect their financed homes in the event they suffer damage that cannot be paid for out of pocket.
While most homeowners are allowed to purchase their own coverage, in some instances, the lender will impose their own coverage on the home, especially when homeowners allow their own policies to lapse.
Known as force placed insurance, this type of coverage is becoming infamous for is high rates and links to foreclosures among homeowners.
Is it legal for lenders to place their own coverage? What can borrowers do if they realize their lender has forced this coverage on them?
What is Force Placed Insurance?
Force-placed insurance is an often hidden practice of the lending world and occurs when, unbeknownst to the homeowner, an insurance policy lapses and the lender then imposes its own policy that costs far above the market price.
Because homeowners insurance can be tacked onto monthly mortgage payments, the high cost of this insurance has left some homeowners unable to keep paying for their homes. Forced to default, a rising number are now finding it challenging to avoid foreclosure.
Why Force Placed Insurance Is Enforced by Lenders
So why would lenders take this action on borrowers? Some say, simply because they can. Until the mortgage loan is completely paid off, the lending company still owns the home and has the right to ensure any damage can be paid for in full, which insurance guarantees. By utilizing their own insurance, they know without a doubt that the home is covered.
But as for why these policies cost so much, the Insurance Information Institute told ABC News in a 2010 interview that force-placed policies are riskier because they must be placed on the home immediately and therefore, must come with a higher price tag.
“If there is even so much as a day of lapse, that home can burn down and the bank would be out the home in terms of the collateral,” said Robert P. Hartwig, president of the Insurance Information Institute.
Those who oppose this practice, however, say the high cost is less about risk and more about a big payday. Data shows that in 2010, lenders imposed $5.5 billion worth of force placed insurance on borrowers nationwide. This represents a $4-billion increase from five years ago.
Chase Bank Catches Heat for Imposing Force Placed Insurance
One company that has taken a lot of heat for imposing force placed insurance on borrowers is J.P. Morgan Chase. Recently, George Champion III, the grandson of former Chase Manhattan Bank Chairman George Sr., filed a lawsuit against the bank.
Despite the fact that Champion III headed real estate and investment businesses in La Jolla, Calif., he too became the victim of force placed insurance–and by the very bank that succeeded his grandfather’s bank.
It all started when, in Nov. 2009, Champion inadvertently failed to renew his insurance policy. By late Feb. 2010, he’d received a letter from his lender, Chase, letting him know that he needed to maintain his insurance to meet the terms of his mortgage.
By March 7, he’d purchased a new policy and sent proof of coverage to Chase. But the following month, Chase obtained its own force-placed policy from American Security Insurance Co. and added it to Champion’s mortgage payments. To his shock, this policy was five times more expensive than the industry norm and was backdated to Nov. 12, 2009, which was the date he failed to renew.
He decided to sue the company, citing the price of Chase’s insurance “bears no fair or reasonable correlation to Chase’s expenses.” However, in 2011, he decided to withdraw the suit because it would cost more time and money than it was worth.
Of course, not all homeowners are afforded the same luxury as Champion. It may have already been challenging to afford their mortgage payments with the insurance they’d selected, let alone a significantly more expensive force placed policy.
Unfortunately, other companies are also issuing these policies if homeowners fail to renew their coverage with their insurers. Chase alone has imposed upwards of $163,000 in policies. With profits often huge for lenders who receive commissions or fees from insurers, there’s no real incentive to stop.
Is Force-Placed Insurance Legal?
To the surprise of many homeowners, force placed insurance is actually legal. In fact, lenders can not only force a standard homeowners insurance policy, but also impose force-place flood insurance and other types of special coverage. In other words, they’re free to follow their own rules.
For instance, in Illinois, Christopher Gustafson’s insurance lapsed in Dec. 2009, after which Bank of America imposed its own policy; it increased his cost by 62 percent. In this case, the company wrote the policy for $76,300 worth of coverage even though the balance due on the loan was only $47,946.
In another instance, Margery Golent’s hurricane insurance lapsed due to an error made by her insurance company. Her lender imposed a policy that was backdated by a year, which covered a time when there were no hurricanes. The new policy covered wind and flood damage, as well, even though her insurance for those hazards had never lapsed.
Due to what seems to be a lack of regulation over lenders in their use-or abuse-of force placed insurance, other homeowners, similar to Champion, have tried to sue. Unfortunately, the law is not on their side just yet.
This is not to say that attempts to govern these policies haven’t been made.
Lawmakers conducted a probe into the acts of lenders and determined that the costs associated with the policies were problematic enough to add a clause to the Dodd-Frank Financial Reform Act.Â It said that if the policies must be imposed, they should be reasonably priced and can only be issued “after the servicer has provided two notices to the consumer, at prescribed times, and the borrowerâ€™s subsequent failure to provide evidence of insurance.”
This addition to the act was short-lived, however. Before it was signed into law, the Mortgage Bankers Association successfully lobbied to have it removed, leaving very few protections for homeowners.
It seems that it has also left room for some lenders to go a step further in imposing their coverage. According to the National Mortgage Complaint Center (NMCC), some lending companies are going as far as forcing insurance on loans while homeowners are still paying for their original coverage. Others are forcing borrowers to take on coverage when buying a home, even threatening that they cannot move in until the coverage is purchased.
It’s for this reason that the NMCC is seeking complaints. It is currently asking homeowners to visit its website at NationalMortgageComplaintCenter.com for information on what to do if they find themselves being forced into this coverage.
But what if you want to side-step being forced into this type of coverage in the first place?
It seems that depending on how ambitious the lender is, it may be impossible to completely avoid this coverage. In the best-case scenario, a good rule of thumb would be to never allow your original policy to lapse. Be sure to check the term end date to ensure your lender doesn’t have a chance to impose its own policy.
As seen in Champion’s case, once you’ve lapsed, even if you purchase your own coverage, the company now has the right to impose its own, leaving you vulnerable to increased mortgage loan payments, and in a worse-case scenario, foreclosure.