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Force-Placed Insurance Begat Huge Profits for Insurers: Hearings

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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.


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Posted by

No, but Wells Fargo is within the line of banks that have taken money along the attempt of securitizing the note. Since my last submission of a comment to this site, my bank has applied yet another forced place policy via QBE (same as the first) which I believe gives a commission to my bank since it appears they are in partnership and also fellow investors under the name of Sequoia in the SEC filings. Unbelievable.

Posted by

Hi Liz,
Is your Bank Wells Fargo???????

Posted by

GMAC/Balboa insurance swindled me. Month 7 into the loan/purchase. in IL you must have 1 year prepaid ins in order to close. Not to sound stupid, but they all seemed in cohoots, i.e. judges, atty general, congressmen, etc etc. they won, the final judge covered his ears so he wouldn't hear me.

Posted by

What's even worse is the fact that so many banks have been allowed to continue their multiple non-compliance behaviors for the length of time (years, in this case) that they have been. I'm a single Mom of two young boys and join the rest of our nation in struggling with the economy. I accepted a trial modification 3 1/2 years ago when the nighmare started and my bank is still busy making what I think are purposeful mistakes in their favor with everything from overcharging huge amounts to my escrow based on incorrect numbers, an unecessary forced placed policy even though I have had a policy in affect for 16 straight years and delays beyond believe. Even more of a shocker, while the president of my bank has been copied on emails since the begining of the year with my single point of contact at Sun*****, she rarely if at all follows up on emails and phone calls and recently told me she was instructed not to put anything in writing. Guess it's not enough for us to fight the economy, banks like mine are clearly luders in a disaster and no one is willing to stop them.


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