The little-known practice of "force-placed" home insurance is
increasingly being assailed as unnecessarily costly and often
harmful to homeowners.
Force-placed insurance, which sometimes is called "lender
placed," can be imposed after you've let your
lapse. That commonly happens when you fall behind on the mortgage
and your lender no longer pays the premiums to your insurer from
your escrow account.
Your bank or lender, citing the need for the property to be
protected against a loss, then can buy another insurance policy and
"force" it on you - along with the associated payments, which are
often higher significantly higher than for a policy you'd buy on
But the practice is highly controversial.
On April 5, 2012, New York's Superintendent of Financial
Services, Benjamin M. Lawsky, announced a
new probe into force-placed insurance
and its excessive rates. His department found that force-placed
insurers are paying out little in claims compared to the premium
dollars they take it. One insurer pays out as little as 20 cents
for every premium dollar charged.
Jeffrey Golant, a Florida attorney who has represented
homeowners who feel they've been unfairly force-placed by lenders,
says most people aren't aware of the process.
"In my opinion, there are many, many people who are completely
victimized by this," he says. "They may not know it can affect them
[and are] surprised when it does."
A recent Reuters article
says that government-controlled Fannie Mae hopes to reduce such
costs to homeowners by overseeing the policies itself.
Chorus of complaints
Some government officials are responding to growing complaints
about force-placed policies. Richard Cordray, director of the
federal government's Consumer Financial Protection Bureau, says his
agency will propose rules sometime this year restricting the
practice. The aim, he noted in a speech to state attorneys general
in early March, is "to prevent [mortgage] servicers from charging
for this product unless there is a reasonable basis to believe that
borrowers have failed to maintain their own insurance."
New York is at the forefront of tackling this issue. Benjamin M.
Lawsky, the superintendent of the New York State Department of
Financial Services, recently directed his office to
start an investigation
into several large financial firms to determine if they
fraudulently pushed homeowners to buy the force-placed
The probe is ongoing, but The New York Times reported in early
January that companies under investigation include JPMorgan Chase,
Bank of America, Citigroup and Wells Fargo.
On the West Coast, Dave Jones, California's insurance
commissioner, has asked the major insurers who sell force-placed
coverage to lower their rates for such policies.
In calling for the rate reductions, Jones said in a news release
that the insurance department's review "of the forced-placed
insurers" loss ratios -- the percentage of every premium dollar an
insurer spends on claims -- found that the loss ratios are low,
which typically points to excessive premiums and is evidence to
support complaints about the absence of arm's-length transactions
between lenders and forced-placed insurers."
Insurance industry justifies force-placed
While accepting that it makes sense to review force-placed
policies and their pricing, the insurance industry says the
practice is reasonable when considering the financial risks
involved if a home or property is not fully protected.
"You have to keep in mind that there needs to be a way for
lenders to protect their interest in the home or property if the
homeowner has fallen behind on payments," says Michael Barry, a
spokesperson for the Insurance Information Institute. "The lender
has a stake in the property and shouldn't have to face a partial or
total loss" if there's damage.
"Are the premiums [for force-placed insurance] too high? That's
the big question, and it looks like [regulating agencies] are
determining that," says Barry.
What can you do about it?
Golant and other lawyers say there are steps homeowners can take
to avoid being force-placed:
- Don't fall behind on the insurance payments for your property
and be sure to keep up with your mortgage if your insurance
premiums are paid from an escrow account.
- If you are force-placed, keep all your documentation in
order. You may need it if you seek legal help. All communications
with your bank or lender should be in writing, preferably through
certified mail, so you'll have a written record.
- If you think you've been unfairly force-placed, don't
hesitate to contact your state's department of insurance and ask
for a review of your situation.
Golant also recommends alerting your state and federal
representatives to the problem.
"Any way you can get [those in power] to know your problem and
what is affecting many others, well, that seems reasonable to me,"