According to Bloomberg (05/06/12), banks and mortgage services have agreements with insurance companies to buy policies on behalf of a homeowner whose insurance coverage has lapsed. The bank forwards the premium to the insurer, the insurer pays a commission to the bank and the homeowner is billed for the premium and commissions. Bloomberg notes that premiums on force-placed insurance were in excess of $5.5 billion in 2010.
Forced-Place Insurance Complaint
Forced-place insurance allows banks and lenders to protect their interest by allowing them to put insurance on a property that they have a mortgage on. Critics say that once the financial firms realized there was profit to be made in force-placed insurance, financial institutions formed their own specialty insurance companies, so they could offer force-placed insurance on properties without insurance coverage.
Some regulators, including in New York and California, argue that the percentage of premiums paid on claims are lower than insurers said they would pay out. Although insurers reportedly estimated a loss ratio of 55 cents on the dollar, they actually pay out about 20 cents on the dollar.
Furthermore, some critics argue that force-placed policies have less protection than cheaper policies and the policies usually protect the lender, not the homeowner. Finally, there have been complaints that servicers are not removing the force-placed insurance quickly enough. Once a homeowner shows proof he has other insurance coverage on his house, the force-placed insurance should be removed, but critics argue that the removal is happening too slowly.
Many consumers whose insurance coverage has lapsed are already at risk of having their home foreclosed on; their insurance lapses because they cannot afford it. Critics of force-placed insurance argue that the coverage is so expensive, it further pushes homeowners into financial crisis, increasing the risk of foreclosure. They state that if the cost of force-placed insurance reflected the actual pay out, the financial burden on homeowners would be reduced.
Forced-Place Insurance Lawsuits
Force-placed insurance lawsuits have reportedly been filed against banks, lenders or loan service providers for force-placed mortgage insurance. The lawsuits allege consumers are charged excessive and unreasonable premiums for their force-placed insurance. Plaintiffs argue that force-placed insurance policies cost up to 10 times more than traditional homeowners insurance. Meanwhile because banks have set up their own specialty insurance affiliate companies, there are concerns that the financial institutions are involved in a conflict of interest. Finally, there are allegations that unrelated companies may have offered kickbacks for forced-place insurance policies.
Force-placed insurance lawsuits allege that financial firms impose onerous force-placed insurance contracts, requiring property protection where none was previously required. For example, one force-placed insurance lawsuit against a financial firm argues that the defendant charged borrowers for flood insurance at almost 10 times the market rate even though flood insurance had not been required from previous insurance providers.
According to The New York Times (01/10/12), JPMorgan Chase, Bank of America, Citigroup and Wells Fargo are being investigated by the New York State's Department of Financial Services. The same article notes that one investigation involves a homeowner who paid $2,000 for home insurance to State Farm, but wound up paying $6,000 a year in forced-place insurance.
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