Force-placed insurance, sometimes called lenders insurance, is insurance that is forced onto a property when the property owner allows regular insurance on that property to lapse. The force-placed insurance is intended to protect the bank’s investment in that property should anything catastrophic happen to it - without regular insurance, both the property owner and the bank would suffer huge losses.
The basic issues with force-placed insurance - and there are many issues, according to allegations made in lawsuits against companies involved in the transactions - are that the force-placed insurance is drastically more expensive than commercially available insurance and often has less coverage. Other issues include that it is being forced on property owners who already have adequate insurance in place, that it is being placed retroactively for times when no claim was made on a home, that the coverage is higher than the value of the mortgage, that it forces extreme coverage when none is necessary - such as requiring specific flood insurance even if the property is not in a flood area - and that the companies involved in force-placed insurance receive kickbacks for force-placing insurance policies.
There is a long list of complaints about force-placed insurance, long enough that federal regulators have looked into revamping the system. In 2014, the Consumer Financial Protection Bureau set rules prohibiting kickbacks in exchange for placing the insurance. The Federal Housing Finance Agency has also said it will take steps to curb unethical practices in the force-placed insurance industry.
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A different lawsuit filed against HSBC Bank and three insurance companies will see the plaintiffs sharing in a $32 million settlement. Class members will receive refunds of 13 percent of the net annual premium.
Some companies have announced that they are moving out of force-placed insurance. Those that remain may find themselves held to much stricter standards in the future.