Mortgages

What Is Force Placed Insurance

By David Krug David Krug is the CEO & President of Bankovia. He's a lifelong expat who has lived in the Philippines, Mexico, Thailand, and Colombia. When he's not reading about cryptocurrencies, he's researching the latest personal finance software. 4 minute read

Most people who buy a house finance the purchase with a mortgage loan. If you’re in that group, you’re probably aware of the mountain of paperwork and legalese that must be navigated.

While it’s unrealistic to expect you to memorize your mortgage loan’s fine print, there are a few conditions you should be aware of. Typically, a mortgage agreement will detail the specific types and minimum levels of coverage that are necessary for a homeowner’s policy. 

You may, for instance, require insurance against burglary, arson, or other incidental damages to your house. In the case of a calamity, you should have adequate insurance so that you can have your mortgage paid in full. Depending on where you live, you may also be required to get specialized insurance, such as wind or flood protection.

Your mortgage agreement may permit your lender to acquire the insurance on its own if you fail to have the minimum levels of coverage in place at all times. This is what is known as “force-placed insurance,” and it often comes at a hefty premium.

Costs and Risks of Forced Insurance

Costs

Your mortgage lender can get any insurance it wants under the regulations for force-placed insurance if you don’t have the insurance needed under your mortgage conditions (or if your coverage lapses).

In such a circumstance, your lender will not do any price comparisons on your behalf, so you should expect to pay substantially more for your insurance policy than you would if you bought it on your own. To illustrate, the premiums for a force-placed insurance policy might be as much as ten times the rate of a comparable non-forced policy.

Insurance that is imposed upon a borrower is notoriously pricey due to the fact that banks often earn from the sale of such protection. Bank of America, for instance, uses a wholly owned subsidiary to acquire force-placed insurance on behalf of its mortgage clients. J.P. Morgan, another prominent bank, uses Assurant for its force-placed insurance needs. 

Assurant then pays a J.P. Morgan subsidiary to reinsure the policies the parent company has sold. A total of $5.5 billion was made in premiums through force-placed insurance in 2010 due to similar actions among large banks.

Risks

In most cases, the premiums for lenders’ force-placed insurance are included in the monthly mortgage payment. Several dangers arise from this. The risk of falling behind on loan payments is one concern. When you’re already struggling to make ends meet as it is, late fines and penalties might make it that much more prohibitive to fall behind on your loan payments.

Another important issue is that the majority of the time, homeowners who are forced to get insurance are already in financial distress and unable to make the premium payments on time. If you’re having money problems, it’s tempting to let your insurance policies lapse. 

Doing so might result in a forced-placed insurance payment. If this happens, you might be put in an even more precarious financial position if your insurance premiums spike dramatically and you find yourself unable to keep up with the increased payment.

Avoiding Insurance Forced Upon You

Do all in your power to avoid a lapse in your mandatory insurance coverage to avoid having coverage imposed on you. This means always having insurance that meets or exceeds the minimal criteria set forth in your mortgage contract, which may be found by reading the deal thoroughly.

Yet for some homeowners, even this isn’t enough, since they were not given enough time to shop around for hazard insurance and had to have it bought for them. If a homeowner decides he doesn’t need flood insurance, for instance, he won’t get it. But if the insurance regulations change and he is told he needs a flood policy, he might not have time to get one before the mortgage lender buys one on his behalf, at a high cost to him.

How to Get Started

In the event that your insurance coverage lapses or your lender obtains coverage that you do not already own or did not anticipate needing, you must take the following immediate measures:

  • Check your monthly mortgage statement for unanticipated costs. If force-placed insurance was purchased on your behalf, you must contact your lender to see what insurance you are lacking so you may swiftly acquire your own policy to satisfy coverage requirements.
  • Be on the watch for communications suggesting additional insurance needs from your lender. If you receive a notification, act promptly and acquire the necessary plans.
  • Contact your mortgage lender as soon as possible if force-placed insurance has been obtained for you. You may also need to contact your lender by telephone. Be prepared to give sufficient evidence of insurance, and continue to follow up until the forced insurance is gone. This may need many phone calls.

You should take the necessary safeguards to prevent this big expenditure, even though the Consumer Financial Protection Bureau has been working to safeguard customers from forced insurance placement and exorbitant rates.

Bottom Line

Not only are you required to get homes insurance by your lender or bank, but you should also have it to safeguard your investment. However, no one should spend more on insurance than is strictly required. Maintain proper home insurance, and if coverage stops for whatever reason, move quickly to reinstate it and have your mortgage lender cancel the force-placed policy.

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