Avoid Force-Placed Insurance

December 9, 2014

Being broke has all kinds of negative consequences.

When your mortgage insurance is cancelled for non-payment, your bank or loan servicer may obtain insurance to protect the property and charge you for it. That right is in your mortgage and deed of trust and is called “force-placed” or “lender-placed” insurance. Let’s explore why it’s no good for you.

First, you will receive a bill. Most lenders increase your monthly payment to pay the negative escrow balance caused by purchasing the insurance policy. Force-placed insurance is usually more expensive than homeowner’s insurance. This can raise your monthly payment several hundred dollars. If you fail to pay the insurance, the lender can foreclose on your property.

Second, force-placed insurance is designed to cover the mortgage company, not the homeowner. For example, should a fire burn down your house, most force-placed insurance policies will cover the lender up to the amount of the loan. It does not pay you for your equity in the home, and it does not cover your personal property, such as clothing or household items. Likewise, force-placed insurance does not provide liability coverage for instances where the homeowner is responsible for damage or injuries to others.

The Dodd-Frank Wall Street Reform and Consumer Protection Act requires that notice must be given to the homeowner before force-place insurance can be ordered. The notice must provide:

  • there is an obligation to maintain hazard insurance
  • that the servicer does not have proof of insurance coverage
  • the procedures for providing evidence of existing coverage, and
  • if the borrower does not prove coverage, the servicer may force place the insurance.

A second written notice to the homeowner is required 30 days after mailing the first notice. If the homeowner does not provide proof of insurance coverage within 15 days after the second notice, the servicer can force-place the insurance coverage. Force-placed insurance may be cancelled when the homeowner provides evidence of insurance coverage.

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