5 ways to protect yourself against lender-forced insurance
If you don’t buy homeowners insurance -- or don't have enough insurance in the eyes of your lender -- your mortgage company could take out a policy for you and force you to pay for it.
This practice of lender-forced insurance is the subject of numerous investigations and lawsuits over alleged consumer gouging.
In general, these policies -- also called force-placed insurance -- have much higher than usual premiums, pay out little in claims and provide less coverage.
That's because, when your lender forces insurance on you, it gets to choose how much to purchase, who your insurer will be and what your deductible will be.
It may have a financial relationship with the insurer it chooses and often adds hefty administrative fees, too.
"Banks are permitted to use their own subsidiaries currently, therefore they have a vested interest to not watch out for their borrower but instead try to find the most costly policy to place the borrower in," says Roy Oppenheim, a foreclosure defense attorney in Weston, Fla. "This absolutely must be changed."
In some worst-case scenarios, homeowners who can’t afford their mortgage payments with the new, expensive, lender-forced insurance have found themselves in foreclosure.
And it’s not enough to just have a policy. That policy must meet minimum coverage requirements. (At least one of the lawsuits over lender-forced insurance involves a bank changing coverage requirements.)
It takes some vigilance, but you can fight back against force-placed insurance. Here are five steps to follow:
Step 1. Get to the source of the problem immediately.
Did you forget to pay your premiums? Does your lender say your policy doesn’t provide enough coverage? Do you have insurance, but your lender isn’t aware of it?
Oppenheim says the best thing homeowners can do is to make sure they have their own insurance with the correct coverage.
Step 2. Don’t let your policy lapse.
If you can’t afford to renew your existing policy, see if there’s a less-expensive policy available that still meets your lender’s requirements. You may be able to increase your deductible, lower your coverage and get a more competitive price by shopping around.
Step 3. Don’t procrastinate.
If you receive a letter from your lender saying you have 45 days to provide proof of sufficient coverage, that might sound like a long time to handle the problem. But if you run across any bureaucratic roadblocks in the process, that grace period will fly by.
Step 4. Watch your escrow account.
If you have an escrow account, your lender is responsible for remitting your homeowners insurance premiums. But that doesn’t mean it always will, even if you’re current on your mortgage payments.
Consumers who have fallen behind on their mortgage payments also have seen their lenders stop paying their insurance premiums from their escrow accounts, causing the policies to lapse.
Check your monthly mortgage statements and watch your escrow account balance to make sure your lender is actually paying your insurance premiums on time.
Even if it isn’t your fault that your policy lapsed, you can bet your lender will still try to force-place insurance.
Step 5. Keep your lender in the loop.
If you change insurance companies, make sure the new policy names your lender and make sure your lender promptly receives a copy of your new policy’s declarations page.
If you do find yourself with a force-placed policy, you’ll need to take steps to get it removed:
- Provide your lender with written proof that you’ve met its insurance requirements through a copy of your policy’s declarations page.
- Get a written statement from your lender confirming that it’s received your documentation, that you’ve met the requirements and that your force-placed policy is canceled.
- Get written confirmation from the company that issued your force-placed policy that your policy has been canceled.
- Make sure you get any refund you’re entitled to from a canceled force-placed policy.