Force-Placed Insurance Begat Huge Profits for Insurers: Hearings

Albany, NYOn the surface it seems reasonable: a lender, for various reasons, deems it necessary to force-place additional insurance onto a homeowner in order to protect the investment. In some cases, a policy may have lapsed. However, it appears as if the incidence of forced-placed insurance terms is growing because it's more profitable for the insurance companies.

Recent hearings conducted by the New York State Department of Financial Services appear to reveal an environment that suggests cozy relationships between insurers and lenders. The mortgage servicer, or lender, force-places additional insurance that is more profitable for the vending insurer than standard policies, yet provide reduced coverage for the insured. There are also allegations that lenders receive kickbacks from insurers in exchange for undertaking this new source of business for insurance companies.

Lenders maintain their investments—properties for which they hold mortgages or some other form of liability—need to be adequately protected.

However, plaintiffs in forced-placed insurance lawsuits claim that changes to an existing policy already in good standing, or the arbitrary placement of additional insurance, was unnecessary and resulted in increased premiums.

Birny Birnbaum, Executive Director of the Center for Economic Justice, said in comments published in a May 2012 news release that major problems with forced-placed insurance are high premiums lacking justification when measured against the value and what those premiums buy.

Birnbaum noted that when one looks at forced-placed insurance terms, one discovers that such polices—while more expensive—lack coverage found in private policies that aid consumers with added living expenses, as well as losses related to personal property.

Many policyholders having forced-placed insurance mandated upon them have discovered that the covered liability has changed from the value of the loan, mortgage or line of credit—to the full replacement cost of the structure, regardless of market value. What's more, many policyholders are discovering that a policy that dramatically increases their costs is suddenly bereft of coverage for personal possessions.

"The high premiums and low loss ratio are highly profitable for insurers," Birnbaum said.

The Virginia State Corporation Commission's Bureau of Insurance, in a release published by States News Service (5/29/12) agreed with the prevailing view that forced-placed insurance premiums are typically much higher than premiums for standard insurance.

And Benjamin Lawsky, Superintendant for the Department of Financial Services in New York State, noted at the start of recent public hearings on insurance rates in Albany, New York that in some cases premiums for forced-placed insurance are "exponentially higher" than regular homeowners insurance. It was also stated during the hearings that forced-placed insurance terms related to premium cost has more than tripled since 2004, producing enormous profits for insurers, and the lenders involved.

The hearings heard that on a typical homeowner's policy, at least 63 cents of every dollar pays claims, Lawsky said in a report published by the Associated Press (5/17/12). But with force-placed policies, he said, the loss ratios "drop precipitously," often below 25 cents and sometimes as little as 17 or 18 cents on the dollar pays claims, while the rest is mostly profit.

Little wonder many policyholders are pursuing a force-placed insurance class action.