Home and car ownership is a funny thing. Since most people have to take out loans to buy a house or a car (even a used one), you don’t really “own” anything until you pay off the note. Your lender has a stake in the property, after all—the house or the vehicle is the collateral on the loan—and so they have the right to insist on a few things, like carrying insurance.
Most people know that their lender requires them to have home insurance or extra car insurance, and it’s not a big deal because insurance for big-ticket items is usually a good idea. But you may not be aware that your lender can go ahead and purchase insurance coverage for your property on your behalf—without your permission. It’s called force-placed insurance.
What is “force-placed insurance”?
Force-placed insurance is insurance coverage your lender forces you to pay for. If you read your mortgage agreement or the loan papers for your car, you’ll almost certainly find language that requires you to have sufficient insurance for the property. If it’s a mortgage and your house is in a flood plain, you’ll also be required to carry flood insurance.
If your lender doesn’t see proof of insurance on your home or car in their files, they have the legal right to protect their investment by purchasing a policy for you—and forcing you to pay for it. Car and mortgage lenders will tack the extra cost right onto your monthly payment. There are a few basic scenarios where this can happen:
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You fail to buy or maintain insurance on your home or vehicle.
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The lender doesn’t have a record of your coverage, even though you have it—or your lender isn’t listed on the coverage as a lien holder.
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The lender thinks you need more coverage than you have, or additional coverage (such as flood insurance).
While it’s pretty sensible to carry insurance on expensive things like a house or a car, and for lenders to protect their loans by insisting on insurance, force-placed insurance can cause you a lot of problems if you’re not paying attention.
Potential risks
If your lender thinks you don’t have an insurance policy on your property, or insufficient insurance, you’ll typically get at least two letters instructing you to rectify the situation, and giving you at least 45 days to fix things. If you don’t provide proof of insurance (or additional insurance), they’ll go ahead and force a policy on you.
Normally this is a straightforward paperwork problem: Your lender has incorrect information and you just need to provide the proof of insurance. But there are a few scenarios where you can get trapped in bureaucratic hell and find yourself being billed for insurance you don’t need:
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Unreasonable valuations. When you purchase insurance for your home, there’s a ceiling on how much money you can get if your house needs to be rebuilt. There can be a conflict between the maximum amount of coverage you can get for your house and the maximum amount of coverage your lender wants you to have, because they require that your insurance covers the amount of the loan as well as the cost to rebuild. This can be an unreasonable amount of money if you have a big mortgage.
Every few years my lender sends me a stern letter informing me that I don’t have enough flood insurance on my house, but I have the maximum amount of insurance I can get. So I have to spend a few weeks sending them documents to convince them of this fact.
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Unacknowledged coverage. If you own a condominium or live under a Homeowners Association (HOA), you might have group coverage shared among all of the owners. If your lender doesn’t understand this, they may try to force you to purchase separate insurance on your unit even though it’s not necessary.
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Financial stress or risk problems. If you’re dealing with financial stress and think skipping your home or car insurance might be a way to save a little money, this will backfire because your lender will force a policy on you, and that policy will probably be a lot more expensive than one you purchase yourself. If you can’t get an insurance policy because of credit history, the condition of the property, or your claims history, your lender may force a policy from an insurer they own or have a partnership with that will also be much, much more expensive than a private policy. These policies also commonly offer minimal coverage, leaving you exposed to a lot more risk than you should be.
Avoiding force-placed insurance
If your lender sends you a notice that they’re forcing insurance on you for any reason, here’s what you can do:
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If you don’t have a current policy on your property, put one in place as soon as possible. The clock is ticking before you’re forced into a policy you didn’t choose and that may be a lot more expensive than one you can secure on your own.
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Contact your insurer to make sure that your policy is active. If you somehow missed that your insurance has lapsed for some reason, take action to get it reinstated.
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Contact your lender. If they are mistaken about your insurance situation, supply the necessary documentation and proof of coverage. If they move forward with the force-placed insurance, send them a written notice of error.
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If your lender has erroneously put a force-placed insurance policy into effect, pay the premiums until everything is sorted out. As unfair as this seems, failing to pay those premiums could lead your lender to launch foreclosure or repossession actions.
