LawyersandSettlements (LAS): What is the practice of force-placed insurance?
Lorenzo Cellini (LC): When a person takes out a mortgage to purchase his or her home, the lender requires as part of the terms of the loan that the homeowner maintain property insurance to protect the home in the event of a disaster. If the homeowner allows the property insurance policy to lapse, then the loan agreement allows the lender to purchase a new policy to protect the bank’s investment and then bill the homeowner for it. It is also known as “lender-placed insurance.”
LAS: Why is Force-Placed Insurance unlawful?
LC: Although the practice of force-placing insurance in and of itself is not unlawful, it became common within the mortgage industry for banks to partner with insurance companies that would charge consumers a premium for their force-placed insurance policies, in some cases many times above the market rate. A portion of this premium was then paid to the bank as a “kickback” for allowing the insurance company to force-place its policies on the banks’ borrowers.
LAS: The illegal aspects are kickbacks and retroactive billing. But without these two practices, the insurer and lender are within their rights to charge the homeowner?
LC: Unfortunately, yes. Under terms of loan agreements, the vendor requires you, the homeowner, to carry insurance in the event of disaster such as flood, fire, hurricane, etc. If you don’t purchase the policy, they have the authority to buy it on your behalf and they bill you for it.
Under their loan agreements, they have the authority, but in an industry-wide practice, banks partner with certain insurance companies and allow them to monitor banks loans to see if the borrower’s policies for property insurance had expired. And if so, they would charge way above market rates.
LAS: So financial institutions and insurance companies are in cahoots, working together to bilk the homeowner? That sounds very devious.
LC: It is devious. Abusing your contractual relationship is illegal and it takes unfair advantage of the contract you have with the consumer. You are not acting in good faith. Both sides are acting in bad faith and conspiring against the homeowner.
Through partnership with a lender (such as your bank), they charge a premium for the policy that they force-place and then they remit a portion of that premium to the bank in exchange for allowing them to have this partnership in the first place. In other words, they get an illegal kickback, as I mentioned above.
LAS: And if they find a policy that has lapsed, they will make even more profits at the homeowner’s expense.
LC: Yes. In some cases force-placed insurance was billed to homeowners retroactively. In other words, homeowners were billed for property insurance during the period of time that their previous policy had lapsed, in addition to being billed for a new policy going forward. Also, there have been reports suggesting that homeowners have been billed for forced-placed insurance even though they already have a policy that covers their home.
LAS: It sounds like the homeowner doesn’t get notified when it is time to renew their property insurance.
LC: You’re right, the homeowner is not notified if their policy has lapsed - the lender will notify by way of sending you a bill. They will send you an invoice for the new policy and sometimes they will also bill retroactively for the amount of time the policy has lapsed. For instance, your policy lapsed three months ago so here is what you owe us.
LAS: The homeowner cannot just say NO?
LC: There is not a whole lot that you, the policyholder/homeowner, can do at this point. If you don’t pay the premium, you are technically in default and the bank has the right to foreclose on your home. Of course, you can complain or plead to get the bank to remove the charge, but if the financial institution refuses, you, the homeowner, will either have to pay up or be at risk of defaulting on your loan. Once you get behind on your loan, the cost of servicing it goes up and up, and you get stuck in a very difficult situation.
LAS: There has to be something homeowners can do to protect themselves and prevent this bad faith practice from occurring.
LC: One thing they can do: Buy a new policy from a market rate insurance company once the force-placed policy is expired. But there is nothing they can do now. And check your policy today to find out when it expires.
LAS: Will there be a forced-place insurance class action anytime soon?
LC: We are currently investigating the potential of bringing a class action. If we are satisfied that we have identified an individual who was victimized by this practice that we believe is unlawful, we do intend to bring a force-placed insurance class-action lawsuit - against these lenders in particular:
LAS: When you mentioned earlier that homeowners need to carry insurance due to the forces of Mother Nature (such as hurricanes and flooding), do you see this practice occurring in states more affected by natural disasters? In other words, the more clauses in your policy, the more chances of getting ripped off?
LC: We believe it is a national problem and there is ongoing litigation brought in a variety of different states, from Florida to California. At the same time, insurance fees can vary from state to state and by the individual.
LAS: Can you file an individual force-placed insurance lawsuit?
LC: Yes. In some cases individuals can get billed for a substantial amount if they have let their policy lapse - if they have been without insurance for some months. For example, in a case filed against Wells Fargo, one of the plaintiffs was billed an annual premium of force-placed insurance for $25,000. In that same case, another plaintiff whose policy lapsed 30 days was charged $1,700 for that one month alone. It is expensive.
LAS: If the homeowner believes they have been unlawfully charged, would you advise they file an individual claim or wait for a class action?
LC: It would depend upon your circumstances. If you did get billed thousands of dollars, then you may want to consider proceeding on your own and hire a Forced-Place Insurance lawyer. But if it is just one month, like the above incident, there may not be enough money to proceed, which is why we are investigating a Force-Place Insurance class action. And we believe thousands upon thousands of people have been subjected to force-placed insurance terms.
One more piece of advice: This is an industry-wide practice that behooves consumers to make sure their policy is in place so they don’t end up in this situation.