What Is Force-Placed Insurance Coverage?
If you fail to maintain the proper amount of homeowners insurance, your mortgage allows your lender to purchase the insurance you are missing, and pass that cost on to you. This is called Force-Placed insurance and typically it is very expensive.
Tucked away in your mortgage, hidden in the small print, is a little surprise that could cost you big, but only if you fail to keep your homeowners insurance premiums up to date.
Every mortgage ever written specifies that the homeowner must carry homeowners coverage in certain dollar amounts. In most cases the house must be covered against damages such as fire, hail damage, robberies as well as specific natural disasters. If you live in a state like Florida that has several flood zone regions or a state where earthquakes are common like California, you may be required to carry extra policies that cover against these specific perils.
In most cases, you will be required to carry enough insurance to fully cover your remaining mortgage.
Here is where that little surprise resides. If you fail to maintain the proper amount of homeowners insurance, your mortgage allows your lender to purchase the insurance you are missing, and pass that cost on to you. This is called Force-Placed insurance and typically it is very expensive.
The Cost of Forced Placed
Your lender is not going to shop around for the best deal when signing you up for the insurance you are missing. In many cases you will be paying up to 10 times what a policy in the marketplace cost.
The reasons for the dramatically higher cost vary. In some cases it is possible a less than honest relationship exists between lenders and the insurer writing forced placed policies. There have been numerous class-action lawsuits that allege kickbacks and commissions being paid to lenders by forced placed insurers.
As an example, the recently settled case with Ocwen Financial Corporation. Plaintiffs, alleged that Ocwen and Assurant, which is a large insurance company “entered into exclusive and collusive relationships.” The case involved over 400,000 homeowners.
In other cases, the mortgage lender may actually be affiliated with the insurer writing the policy. This was the case with Bank of America.
These Premiums Could Ruin You
When a lender takes the forced placed route, the new premium will be tacked onto your mortgage payment. As these policies are usually must more expensive than a normal policy it can push your monthly mortgage payment into unaffordable territory, especially if you were already struggling.
A missed mortgage payment comes with fees and penalties that will push your monthly bill even higher, making it harder to catch up. In extreme cases your may end up losing your home to foreclosure if you are unable to get your mortgage, and insurance payment current.
If you were already struggling with your house payments, a forced placed policy could easily make your home unaffordable.
How to Avoid Force-Placed Coverage
The only sure-fire way to avoid force-placed coverage is to make sure you are never in breach of your insurance requirements and your coverage never lapses. Make sure that you fully understand the insurance requirements of your mortgage.
Verify a standard homeowners policy provides the protection you need, and no additional polices are needed in your area.
If you find yourself falling behind on your homeowners policy, make getting your account current a top priority. If possible, ask friends, and family for help. Remember, once your policy lapses, you are headed for a downhill slope where recovery could be extremely difficult.
What to Do
If your policy lapses, or you notice a force placed policy on your mortgage, the quicker you move to resolve the issue, the better the eventual outcome will end up being.
Keep an eye on your monthly mortgage statement and if you see unexplained charges contact your lender immediately. If the forced placed policy is simply an insurance type you didn’t think you needed (flood insurance for example) contact your insurer to purchase the required policy and provide you lender with proof.
If you have let your policy lapse, your options are a bit more limited. Before losing your coverage, shop around for a more affordable policy to avoid cancellation. Keep in mind you will need to make sure the policy covers all required perils.
Once your policy lapses, finding a new policy will become more difficult and expensive. Insurers frown on lapses and cancellations, which will make you a bigger risk, resulting in a higher premium.
Keep your mortgage payment current and immediately start shopping for an affordable homeowner policy. Once you have secured a policy present your lender with proof of coverage and ask that the forced placed coverage is removed.