What is Force-Placed Insurance?
Force-placed insurance, also known as lender-placed insurance, is a type of insurance coverage that a mortgage lender can purchase on behalf of a homeowner when the borrower’s existing property insurance lapses, is canceled, or is deemed insufficient. This coverage protects the lender’s financial interest in the property, not the homeowner’s personal belongings or liability.
Why Does Force-Placed Insurance Happen?
Mortgage agreements typically require borrowers to maintain adequate homeowners’ insurance as a condition of the loan. If that coverage lapses due to:
- Non-payment of premiums
- Policy cancellation or non-renewal
- Inadequate coverage amounts
- Failure to provide proof of insurance to the lender
…the mortgage servicer has the right to purchase an insurance policy on your behalf to protect its collateral—the home. This insurance is then charged to your escrow account or loan balance.
Filing a Claim with Force Placed Insurance:
1. Coverage Limitations
Force-placed insurance primarily protects the lender’s financial interest in the property so that the coverage may be limited to just the home’s structure. It generally does not include coverage for personal belongings, additional structures (like sheds or garages), or liability protection. As a result, if you damage your property, you may only receive compensation for structural damage, not for the contents inside your home or liability-related incidents.
2. Claim Process
The claims process under force-placed insurance can be more complex because the lender is the policyholder rather than the homeowner. You will need to work closely with the lender or mortgage servicer to understand the claims process and submit the necessary documentation. This often means that the lender will be heavily involved in the approval and disbursement of the claim.
3. Payout and Disbursement
If a damage claim is approved, the payout may go directly to the lender, not the homeowner. The lender might apply these funds toward repairs or, in some cases, toward reducing the outstanding mortgage balance. If repairs are required, the lender might require you to follow specific guidelines or work with approved contractors to fix the damage.
4. Insufficient Protection
Since force-placed insurance does not cover personal property or additional structures, you might be left without compensation for significant damage not part of the main dwelling. For example, if a fire damages your home and belongings, force-placed insurance would likely only cover rebuilding the structure, leaving you to cover the costs of replacing your possessions.
5. Lack of Personal Liability Protection
Force-placed insurance does not include liability protection. If someone is injured on your property or if an incident occurs that would typically be covered under a homeowners insurance policy’s liability provision, you would not be covered. This could expose you to out-of-pocket costs for legal expenses or compensation for injuries.
6. Filing the Claim
To file a damage claim under force-placed insurance:
- Contact the Lender: The claim must often be initiated through the lender or mortgage servicer, as they are the policyholders.
- Provide Evidence: You must submit proof of the damage (photos, videos, or other documentation).
- Follow the Lender’s Process: The lender may have specific requirements, such as using their approved contractors or requiring multiple repair estimates.
- Await Approval and Disbursement: Once the claim is approved, the lender will typically release funds according to its policy guidelines.
How to Avoid Force-Placed Insurance
- Maintain Your Policy: Ensure you keep your homeowner’s insurance active and provide proof of coverage to your lender.
- Update Your Lender: Always inform the lender of any changes or renewals in your insurance policy.
- Shop Around for Better Rates: If cost is a concern, shopping around for affordable homeowners’ insurance policies that meet lender requirements is always advisable.
If a borrower finds themselves in a force-placed insurance situation, it’s essential to address the lapse in coverage, find an appropriate insurance policy, and work with the lender to remove the force-placed insurance as soon as possible.