Force-placed insurance, also called lender-placed or creditor-placed insurance, is coverage of your mortgage lender, bank, or loan servicer purchases on your behalf. Your lender will only take this measure if your own home insurance is canceled, has lapsed, or offers insufficient coverage.
Force-placed insurance isn’t cheap – it’s often more expensive than a policy you could purchase on your own, and the coverage may be hazard insurance only. Regardless, you will be required to pay the lender for the policy they take out on your behalf.
Why would a lender take this step? In short, your mortgage lender wants you to keep your home safe – after all, they have a vested interest in your property. If you default on your loan, the lender has the right to foreclose on it. One way lenders ensure the well-being of their investment is to require you to have homeowners insurance.
What does force-placed insurance cover?
Lender-placed insurance is very similar to conventional home insurance, except that it’s designed specifically to protect a creditor’s financial stake in a property, rather than to protect the property owner.
While many lender-placed insurance policies only protect the creditor up to the amount it’s lent against a property, some policies cover a property up to its full replacement cost. That way, there’s adequate protection in place in the event of a total loss.
When a covered peril triggers a force-placed insurance policy, it’s the lender who files a claim, rather than the homeowner. The lender then works with the insurer to recoup any losses on their outstanding loan that result from damage to the covered property.
When can a mortgage lender buy force-placed insurance?
These situations might prompt your lender to buy a policy for your home without your input:
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You don’t have homeowners insurance.
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Your homeowners' insurance policy lapsed and you haven’t bought a new policy.
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Your current policy was canceled due to nonpayment.
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Your insurer declined to renew your policy and you haven’t bought a different policy.
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Your lender hasn’t received proof of insurance coverage even though you have a policy in place.
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You have homeowners insurance, but the coverage, deductible, or amount of coverage doesn’t meet your lender’s requirements.
How creditor-placed insurance hurts homeowners
Creditor-placed coverage can put a homeowner who is already struggling financially even further behind. That’s because force-placed insurance is usually expensive as is, and the lender usually increases monthly mortgage payments to cover the cost of the insurance.
But expense isn’t the only drawback to force-placed insurance. This policy often provides less coverage than standard homeowners insurance. While it does protect your dwelling from hazards like fire, windstorms, and vandalism, it usually won’t cover your personal belongings, furnishings, appliances, or personal liability.
In a nutshell: force-placed insurance is more expensive and offers less protection than a standard homeowners insurance policy.
Yes, lenders must notify you before buying force-placed insurance
Mortgage lenders and loan services are federally required to notify you twice before buying lender-placed insurance:
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First notice: 45 days before it buys the coverage
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Second notice: 30 days after the first notice and at least 15 days charging you for the coverage
Once the lender gets proof of your coverage, they must cancel the force-placed policy and refund you the cost of the policy for any period of overlapping coverage within 15 days.
What to do if your lender bought force-placed insurance for your home
If your lender bought force-placed insurance in error, notify them immediately. They are required by federal law to cancel the policy within 15 days.
If your lender bought a force-placed policy because you don’t have your own coverage, get your policy reinstated or a new policy in place as soon as possible. Once you have proof of coverage, send it to your servicer and request a cancellation of the policy they obtained for you.
If your insurance policy was canceled because your lender failed to pay your premium through your escrow account, you have grounds for a dispute. Usually, this means you send a formal letter – a notice of error – along with the insurance bill to your servicer. They must acknowledge receipt of the notice within five business days, correct the error in 30 business days, and cover the cost of penalties.
