Force-Placed Insurance

What Is Force-Placed Insurance?

Lien holders will put force-placed insurance onto a mortgaged property in cases where the borrower allows the coverage they were required to purchase to lapse. Lapses may be due to non-payment of premium, filing false claims, or other reasons. Force-placed insurance will protect the property, the homeowner, and the lien holder. Future mortgage payments will reflect the added cost of the insurance.

Force-placed insurance is also known as creditor-placed, lender-placed, or collateral protection insurance.

How Force-Placed Insurance Works

Force-Placed insurance comes with costs that the lienholder pays upfront, but is added to the balance of the lien. Typically, this type of insurance is more expensive than a policy that could have been found by the homeowner. Providers of force-placed insurance will charge higher prices for the coverage because they are mandated to provide coverage, regardless of risk. Increased risk results in a higher premium.

Additionally, lender-placed insurance may offer less coverage for the price than other available homeowner's policies. The policy will cover only the amount due to the lender, which may not adequately protect the home in the case of a full or partial loss. Also, these policies usually do not include personal property or liability protection.

Abuse Inherent in Force-Placed Insurance System

Due to the relative ease of abuse resulting from the use of force-placed insurance, there are specific provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act that require its use to be "bona fide and reasonable."

In some cases, the loan servicer will also have an arm of the business which provides insurance. Uneducated or first-time buyers may not fully understand how to shop for insurance and will assume the lender-placed policy is the same or as-good-as any other product. Some lenders do not practice in the best interest of the borrow. Another tactic is for the lender to include back-dated premiums as they add the sum to the mortgage payment.

As an example, a lender may receive substantial cash incentives or kickbacks from the insurer, as compensation for giving it the policy. Some consumer advocates say the higher prices for force-placed insurance are a result of price gouging or kickbacks to unscrupulous lenders.

Reasons for Not Getting Homeowner's Coverage