Force-placed insurance is insurance that has been put on a home by the bank and loan servicer to ensure the banks’ interest in a property is protected. Often, though, that force-placed insurance comes at a high cost because homeowners do not have a choice in who provides their force-placed insurance.
“When banks lend homeowners money, it is incumbent upon the person to show homeowners’ insurance, which is insurance that will cover the banks’ interest in the property or properties,” Carragher says. “When the borrower does not have evidence of insurance, or when the insurance lapses and the bank and servicer have a duty to track and ensure the property is covered, the servicer goes through a cycle of sending out notices to the borrower requesting evidence of insurance or they will force place the insurance. If there is no evidence of insurance, the force-placed insurance is formed at a rate much higher than what is available for property or commercial insurance, and it has lesser coverage. In homeowners’ insurance there is liability, but with force-placed insurance they are only covering the banks’ interest, so there is no liability and less coverage than with property insurance."
In other words, borrowers with force-placed insurance are getting less coverage, but paying more money. In some cases, one-and-a-half to three times the cost of commercially available insurance rates.
“The issue around that is that some consumers when possessing a mortgage, have a financial setback, and a lot of people have had setbacks over the past years and cannot procure commercially available insurance,” Carragher says. “So the only insurance they have is force-placed insurance, and there are consumers who pay those premiums because they can’t get it elsewhere. Others who can’t pay, or have no intention of paying, their inflated premiums are assessed to GSEs [government-sponsored enterprises] and taxpayers are paying for it.”
When force-placed insurance is put on a property, the borrowers are not given a choice as to who the insurance is from, meaning there is no competition for price. Furthermore, many servicers benefit by force placing insurance because they receive commissions or fees for placing the insurance.
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According to Reuters (9/9/13), neither company admitted wrongdoing in the settlement. Force-placed insurance itself is not illegal, but critics and consumers allege banks and insurance companies work together through commission schemes and reinsurance agreements to drive up the price of policies.
“The individual borrower who has been force placed and goes through holy hell trying to get out of it if it’s been placed wrong can join class-action suits, but as far as that goes, the borrowers who can’t pay their insurance don’t have many answers out there,” Carragher says.