For years, mortgage servicers have been working hard to maintain their bottom lines at the expense of unsuspecting homeowners. One of the unethical practices that has come to light in the last few years affects homeowners who experience a lapse in their homeowners' insurance coverage. Mortgage servicers are forcing these homeowners into expensive insurance policies that not only support their own bottom line, but can also give them kickbacks from the insurance industry (the California Insurance Commissioner has raised concerns about the lack of arm's length transactions between lenders and insurers).
This practice has four names: force-placed, lender-placed, credit-placed and collateral protection insurance. The intension is to protect the lender's financial interests should something happen to the property. We have seen lenders put these insurance policies into place when a property owner's homeowner's insurance has lapsed, is cancelled or is considered insufficient to protect the property.
The difference between force-placed insurance and typical homeowner's insurance
Compared to typical homeowner's insurance policies on the market, force-placed insurance policies typically:
- Have much higher rates
- Do not protect your personal items from loss
- Do not cover owner liability
- May provide financial incentives to lenders
- Are difficult to remove
- Carry significant penalties
Perhaps most importantly, homeowner's insurance is intended to protect the homeowner's interest in their property at an affordable rate. These policies simply do not do that.
Protecting yourself from force-placed insurance policies
If the mortgage industry has forced you into collateral protection insurance, you need to act quickly. If you do not have an active homeowner's insurance policy, purchase one as soon as possible. Give your servicer detailed proof of your insurance and request that they cancel the force-placed insurance policy immediately. To protect yourself, make payments on the force-placed insurance, even if you believe your lender was wrong to initiate it.
Lenders have acted brashly to put these policies into place and have been known to misstep. Some have even failed to make timely payments from escrow accounts, causing homeowners to lose their insurance and then forcing them into an insurance policy that supports the lender's bottom line. The practice itself is questionable. If you have been forced into an improperly inflated homeowner's insurance policy, call an attorney to discuss your options. There may be grounds for a class-action lawsuit.