The purpose of homeowner’s insurance is to protect your home in case it is damaged. In some cases, your mortgage lender may require you to carry a policy known as force-placed insurance, or lender-placed insurance.
What is this type of insurance and what should you know about it? I answer these questions below.
What Is Force-Placed Insurance?
When you take out a mortgage on a home, or a lien is placed on your home, your lender can require you to carry insurance to adequately protect your home from damage and disaster. The reason that your lender does this is because they have a stake in the property—if you are unable to pay your mortgage, they have collateral on your loan, i.e. your home, and thus, will not suffer as great a loss from their investment. If you do not maintain the coverage as required, or you allow your coverage to lapse, your lender may purchase insurance on the property and charge you for it.
This form of coverage is known as force-place insurance.
A lender may force-place an insurance policy on your home for a few reasons, including:
- If you do not have insurance on your home, do not have enough coverage, or allow the coverage to lapse
- If you do not provide your lender with proof of your insurance
- If the policy you purchase does not meet the lender’s requirements
While you might think a force-placed insurance policy is better than no coverage, a force-place policy is going to be more expensive and offer less coverage:
- There is no coverage for Personal Property i.e. your clothes, furniture, electronics, jewelry, and anything that is not part of the structure
- The lenders force-place Carrier does not give you loss of use coverage if you need to live somewhere else while under repair or if the property is unlivable
- The amount of coverage more often than not is only for the outstanding loan amount on your home and not for total cost replacement of your home, like in the case of a total loss from a Hurricane, Fire, or another significant natural disaster
- The lender receives the settlement for the damages and getting that from the lender to get the repairs done can be very difficult and an extremely long process
Can You File a Claim Against the Policy?
Even worse, if something happens to your home, you could have serious trouble recovering anything from the insurance company. One legal case that occurred in South Florida shows what can happen.
In Joseph v. Praetorian Insurance Company, Betty Joseph discovered that two water leaks had damaged her home and tried to file a claim with her insurance provider, Praetorian Insurance Company. Praetorian denies Joseph’s claim, which prompted her to sue the insurance company for breach of contract. In response, Praetorian moved to dismiss the case because the policy was a force-placed policy.
The court ended up dismissing the case because Joseph was named as a borrower and her bank was named as the insured party.
While I am not an attorney, I think this example demonstrates that homeowners need to be very wary of their mortgage lenders placing this type of insurance policy on their homes.
Make Sure You Are the Named Insured on Your Policy
If your lender has force-placed an insurance policy on your home, you need to make sure that you are the named insured. Better yet, seek the help of a professional insurance agent to select your own property insurance and take control of the claim process with the help of a Professional Public Adjuster. If you are the named insured, and you need to file a claim, get in touch with me. These types of cases can be complicated, so you need to make sure you have an experienced professional there to guide you.