Force-Placed Insurance Will Be Examined in NY Hearings

Force-placed insurance is set to be examined by the Department of Financial Services, according to its superintendent Benjamin Lawsky. The department recently set a date for hearings to explore whether bank lenders and insurers that impose this home insurance coverage should be more heavily regulated.

Force-Placed Insurance Displaces Homeowners

The premiums for so-called force-placed insurance — another name for home insurance that is imposed on homeowners with mortgage loans who have allowed their private coverage to lapse — have tripled since 2004, according to New York regulators.

Homeowners complain that an increase in premiums is not the only problem that arises from force-placed coverage. Some have complained that lenders imposed coverage when they accidentally allowed their private insurance to lapse then wouldn’t allow the homeowners to repurchase their own when the mistake was discovered.

Other homeowners say lenders required them to purchase more expensive coverage in order to qualify for their home loans. In many cases, the policies they were forced to purchase didn’t cover personal injury liability or contents in the house.

Because the cost of force-placed coverage can be up to 10 times more expensive than private insurance, it’s not uncommon for homeowners to have problems keeping up with their payments, which are incorporated into monthly mortgage payments. As a result, some have lost their homes to foreclosure in the process.

Home Insurance May Be Imposed for Greater Profit

The Department of Financial Services announced on Thursday its plans to examine just how much bank lenders and the insurance companies they purchase coverage from are benefiting from force-placed insurance. The department shared that premiums increased from $1.5 billion in 2004 to $5.5 billion in 2010 with most of the gains being profits.

Lawsky said the typical homeowner’s policy uses at least 63 cents of every dollar to pay claims. However, with force-placed policies, the loss ratios drop tremendously so that around 25 percent and sometimes as little as 17 or 18 cents on the dollar goes toward paying claims.

The department acknowledged the importance of homes maintaining coverage, but says it wants to ensure that banks and insurance companies are not taking advantage of homeowners.

In its hearings, the department plans to take a closer look at the relationship between the banks and insurance companies to see where profits exist. It says it is prepared to require a minimum loss ratio as it does with health insurance companies, which forces lenders to refund excess premiums paid to consumers if enough revenue is not used for paying claims.