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Forced-Placed Insurances Leaves Homeowners Out in the Cold

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Washington, DCThere is little doubt that the act of allowing homeowner insurance to lapse on a mortgaged property is not, with little exception, done maliciously. For most, the lapse of property insurance has more to do with human error (forgetting to renew), or financial hardship (“do we pay the insurance this month, or feed the baby?”) There is also little doubt, however that while Lender insurance is a perfectly legal and appropriate response in order to protect the investment of the lender, the extraordinary costs associated with lenders insurance are both mean-spirited and unnecessary.

Various Forced-Placed insurance Lawsuits brought by state Attorneys General make that very point - as do lawsuits brought by individual plaintiffs. And various submissions to Congress advocate for capping the exorbitant rates of Forced-Place insurance to a more manageable level, partly by removing costs associated with alleged kickback schemes between mortgage servicers and insurance companies.

For a property wholly-owned by the property owner, property and contents insurance could be viewed as an option given the lack of any outstanding loans on the property. Without a mortgage present there is no legal requirement for a homeowner to carry insurance, as foolhardy as that is. However, by law a property owner is required to maintain property insurance when a mortgage is affixed to that property for reasons of protecting the investment.

The capacity to force-place insurance if a homeowner cannot provide proof of insurance is both legal and justified. But the cost and parameters of Lender insurance - the Forced-Placed insurance terms - is alleged to be something else again.

As many a Forced-Placed insurance lawsuit bears out, lender insurance proves to be prohibitively expensive with rates many times what standard policies would otherwise charge, for less coverage. Such coverage usually does not include coverage for contents, leaving the homeowner out in the cold: in the event of a catastrophic loss, there is no means by which to replace furniture, appliances, or clothing.

More often than not, lenders insurance also covers only the value of the investment the lender has in the property. Thus, in the event of a complete loss, there is no ability to replace the structure as the proceeds are sufficient only to reimburse the lender for the value of the mortgage.

There have also been reports whereby property owners, having allowed their insurance to lapse in error or otherwise, quickly re-instate their insurance coverage once apprised of the need to do so, only to receive notification from the lender that Force-Place Insurance is to be placed on the property for the weeks, or months it was determined that the property was not covered.

The property owner is now paying twice. What’s more, the costs for Forced-Placed insurance are exorbitantly high due, many critics say, to the kickback schemes alleged to exist between lenders and insurance companies. The reality of having to pay twice for insurance puts the homeowner at risk of foreclosure.

Many a Forced-Placed insurance lawsuit and Forced-Placed insurance class action make these very points. In the meantime, so long as the practice continues unabated, the result quite literally leaves the affected homeowner, completely out in the cold.


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Posted by

Interesting article, in reading the second to last paragraph it states that "the borrower is paying twice". However if the borrowers insurance policy lapsed and lender placed insurance was added to loan providing coverage for that period where no insurance existed, the borrower may be paying for two polices at the same time but the coverage periods are different.

Also it doesn't seem that these polices are underwritten all meaning the insurer has no opportunity to determine the level of risk posed, only the value of the property.

If the lender is the insured and loaned money for the purpose of purchasing real property (home), it doesn't seem logical that they would have the legal right to place insurance on a borrowers personal property (unless a lien exists).


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