When buying a big asset like a home or a car, most people need to go to a lender to secure a mortgage or a loan. To acquire a loan, you need adequate insurance coverage. That being said, signing an insurance policy is one thing and keeping up with the payments is another. If for some reason your insurance coverage lapses or is canceled, the lender has the power under the sales contract to take out a forced-placed insurance policy on the borrower’s property to protect their financial investment.
But, what is a forced-placed insurance policy and what should you do if a lender takes one out on your property?
What is a force-placed insurance plan?
Force-placed insurance is designed to protect the lender’s interest. The lender takes a certain amount of risk when they lend high sums of money to a borrower. If the insurance servicer is eventually forced to seize your property to recoup some of their losses, they want the asset to be protected, that’s why they make it a condition of the loan that you acquire adequate insurance coverage. So if you lose or cancel your coverage, the lender has the right to take out a force-placed insurance plan.
A lender may also put a force placed policy on your property if they deem your coverage inadequate. For instance, if flood protection is not included in your homeowners insurance and you live in a flood-prone area, your mortgage lender could take out a force-placed flood insurance plan on your property. Depending on where you live, your mortgage lender may be able to take out other forms of force-placed hazard insurance.
Why you should avoid force-placed insurance plans
When your lender takes out a force-based insurance policy on your property, you are still responsible for the payments. Since the lender is taking out the insurance to protect their investment, they are not likely concerned about finding you the best deal. In fact, a force-placed insurance plan will likely come with a premium charge. Not only that, they will most likely provide less coverage than a standard insurance plan regardless of the more expensive premiums. Since the lender is only interested in the property itself and not your personal belongings, it is not unusual for these policies to exclude coverage for personal property and owner’s liability. That being said, a policy that a lender placed on your property is largely out of your control, so the best course of action is to avoid them altogether by maintaining adequate insurance coverage.
Potential causes for lapses in insurance coverage
Here are some of the common reasons people lose their insurance coverage:
Missed payments: While most insurance companies have a grace period and send out a written notice in case you forget to pay in time. If you wait too long to catch up on your payments, you will find yourself without coverage.
Missing the renewal of a policy: Always be mindful of the deadline to renew your policy and make sure to communicate with your insurance company in a timely manner.
House location: If your house is located in an area considered to be risky by insurance companies (such as an earthquake-prone area), your insurance company may require you to purchase hazard insurance coverage.
Previous false claims: If you have previously filed false claims with insurance companies, you most likely have a record that will make insurance companies wary of offering you a coverage plan.
Poor credit score: If you have a bad credit score then insurance companies may not want to insurance your property. A person’s bad track record of paying bills could potentially mean a loss of revenue for insurance companies.
Old homes: Houses are required to maintain a certain maintenance and structure standard. If you fail to meet these basic requirements, you can lose your insurance coverage.
Wild animals: Most insurance companies are against wild animals being kept in homes; breaking this rule can leave you without coverage.
What to do if a lender takes out a forced-placed policy on your property
If you are aware of a lender placed insurance policy that has been taken out on your property, the first thing you need to do is find additional information. Make sure you know exactly why your insurance wasn’t adequate so you know how to prevent this from happening again.
Secondly, you should try to find another insurance policy that provides optimal coverage at a price you can afford.
Once you purchase the insurance plan, contact your lender. They will provide you with the documents you need to prove you have adequate coverage. If they do not accept your new insurance plan, you may need to contact an attorney to have the existing force-placed insurance removed.