According to court documents (case number SACV-11-00915-JST-AN, United States District Court, Central District of California), Christopher Gustafson filed his lawsuit against Bank of America alleging “unlawful, abusive and unfair practices with respect to force-placed insurance…” The lawsuit notes that when borrowers do not maintain their hazard insurance policies, mortgage loan servicers replace those insurance policies with force-place policies, which are typically more expensive than the original policies but have less coverage. Finally, the mortgage loan servicer allegedly receives financial gain in the form of fees, payments or commissions for using the force-placed insurance.
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The lawsuit alleges that Bank of America used a force-placed insurance policy on his mortgage with a premium of $1,045, almost two times the original insurance premium of $614. Furthermore, the coverage exceeded the lender’s stake in the property because the coverage was for more than $76,000, where as the outstanding balance on the loan was for less than $48,000.
Other lenders have also faced lawsuits concerning their use of force-placed insurance and their failure to disclose that they received a fee or commission for using such insurance, which provides an incentive to go with prearranged policies rather than offering competitive solutions or allowing the borrower to have input into the conditions of the policy.