Forced place insurance is an insurance policy taken out by a lender or creditor when a customer does not carry insurance on an asset. The charges for this insurance are passed on to the customer.
The most common types of forced place insurance are auto and homeowners insurance.
Why Forced Place Insurance?
Lenders take out forced place policies to protect their investments in case the collateral is damaged or destroyed. Without this insurance, lenders might be unable to recover loan balances.
Who Provides Forced Place Insurance?
Forced place insurance is obtained through high-risk insurance companies. Standard companies are unwilling to provide this coverage because of the high probability of loss
Because borrowers who do not carry the necessary insurance coverage on assets represent high risks, premiums for forced place coverage are typically much higher than standard insurance premiums.
Homeowner forced coverage is very costly and does not protect you, the borrower. Many borrowers believe this coverage will cover their contents. Wrong! Further, unless the mortgage documents provide otherwise, the borrower does not have the right to cancel the policy – only the lender can cancel it. Your mortgage lender has the right to protect its collateral from loss. If the property is underinsured, your mortgage lender has the right to purchase lender placed insurance on your property.
Typically, this type of insurance is “bought” by the lender when a borrower’s homeowner’s insurance policy lapses or the borrower changes insurance companies and forgets to let the lender/servicer know about the new company. The lender cannot “pick up your payments” on your existing policy.
Also, lender placed insurance is much more expensive than insurance you would obtain on your own. The lender is not under an obligation to find the cheapest rates for you (the borrower). Further,the servicer’s duties do not include finding the best terms for you or the strongest insurance company. The lender/servicer is not required to protect the content’s of your home or persons on your property (in case someone was injured).
Typically, the premiums are higher for this type of insurance because the insurance industry believes these types of properties are at a significantly higher risk of loss if the borrower has chosen not to insure his property. The increased cost of insurance coverage is the responsibility of the borrower. Remember, amounts disbursed by the lender for force placed insurance or lender placed insurance become an additional debt to you.