How is Force-Placed Insurance Removed?

When a bank or other financial institution agrees to extend a loan for financing an automotive or property purchase, that institution faces significant risks. In most cases, buyers are required to obtain insurance to protect the loan. When that insurance is not obtained, or is otherwise insufficient, lenders can get their own insurance to protect the lender’s financial interests. This is known as force-placed insurance. Removing that insurance is a different matter; iForce-Placed Insurance

What is Force-Placed Insurance?

Much is at stake when a lender or mortgage/auto loan servicer enters into a loan agreement with a property or vehicle buyer. To protect its financial stake in a loan, force-placed insurance was developed to provide a hedge against loss of coverage on the part of the buyer. In simple terms, a force-placed insurance policy is placed by a financial institution when the borrower’s own insurance is insufficient or has lapsed. This specialized insurance policy is often referred to as:

  • Creditor-placed insurance
  • Collateral protection insurance
  • Lender-placed insurance

Why is Force-Placed Insurance Needed?

Most states and most lender agreements require borrowers to obtain property insurance as part of the lending process. Typically, this comes in the form of mortgage insurance or an auto loan insurance policy. There are numerous circumstances where the borrower is unable to obtain or maintain coverage, or coverage is deemed insufficient. Possible insurance scenarios include:

  • Failure of the borrower to pay annual premiums.
  • Policy expiration.
  • Cancellation of insurance policies by the insurer.
  • Withdrawal of adequate coverage.
  • Oversight on the part of the borrower.
  • Difficulty in securing insurance for a property located in a high-risk area.

When the borrower’s own insurance protection falls short, force-placed insurance steps in. Lenders have a legal obligation to ensure continuous and adequate insurance coverage for the properties they finance. J.B. Lloyd & Associates lender-placed insurance serves as a viable solution; it protects the financial interests of lenders.

Why Would Force-Placed Insurance Be Removed?

Under the typical fore-placed insurance policy, premiums are added to monthly mortgage payments, driving them higher. Unfortunately, many borrowers who find themselves with force-placed insurance are struggling financially; the extra cost associated with force-placed policies may be almost twice what homeowner-obtained mortgage insurance costs. There is a financial incentive to remove such a policy when it is no longer needed. Other removal scenarios include:

  • When a homeowner reinstates coverage that has lapsed or expired.
  • When a borrow finds an insurer willing to underwrite an appropriate policy for a high-risk property.
  • When outstanding premium payments have been caught up.

Most importantly, many force-placed insurance policies only cover the outstanding amount of the home or auto loan, and may not include personal property coverage. Borrowers can often get superior protection from a traditional mortgage insurance policy, so removing a force-placed policy makes economic sense.

Removing a Force-Placed Policy: Tips for Borrowers

When a force-placed insurance policy is no longer needed, borrowers must take several steps to ensure that it is removed. Removal can have significant financial benefits for the borrower.

First, the borrower must obtain a mortgage or loan insurance policy that meets the amounts required by the lender. Homeowners can choose the existing insurer or choose their own if available.

Next, all applicable documents must be provided to the lender. Adequate insurance in the form of a copy of the new policy is sufficient for proof. This should be sent to the lender via certified mail and also via fax or email, if available. Borrowers should obtain a letter of cancellation from the lender once the force-placed policy is no longer in place.

Force-placed insurance is designed to protect lenders from risk exposures resulting from home or auto loans. They are not always the ideal solution for the borrower. With the above steps, borrowers can remove an existing creditor-placed policy and replace it with appropriate insurance coverage, meeting lender requirements and state laws.

About U.S. Risk

U.S. Risk, LLC. is a wholesale broker and specialty lines underwriting manager providing a wide range of specialty insurance products and services. Headquartered in Dallas, Texas and operating 16 domestic and international branches, U.S. Risk and its affiliates would like to help you access a world of new markets and products. For more information, contact us today at (800) 232-5830.

Force-Placed Insurance

What is Force-Placed Insurance and What Does it Cover?

When a real estate property is financed for purchase, the purchaser is not the only entity with exposure to risk. The lender also faces substantial risks in these transactions. To help manage these risks, a specialized form of insurance known as force-placed insurance is often utilized. This insurance is designed to protect the financial interests of the banking or mortgage-lending institution. As such, it has been a part of the mortgage lending process for decades, offering peace of mind for lenders and homeowners alike. In this guide, we will explore what force-placed insurance is, how it works, and what it covers.

Many Names, Same Protection: An Overview of Force-Placed Insurance

Force-placed insurance is an insurance policy placed by a bank or mortgage servicer on a property where the mortgage borrower’s (the homeowner’s) own insurance coverage has lapsed or is deemed insufficient to adequately protect the lender’s interests. Force-placed insurance goes by several names, including:

  • Lender-placed Insurance
  • Creditor-placed Insurance
  • Collateral Protection Insurance

The purpose behind this insurance is simple: it protects the lender’s financial stake in a property loan. Homeowners are typically required to obtain their own mortgage insurance, but there are several potential scenarios where securing such protection is impossible or insufficient. These scenarios include:

  • Failure on the part of the homeowner to maintain coverage through annual premium payments.
  • Policy lapses or expiration.
  • Oversight on the part of the borrower.
  • Cancellation of existing policies.
  • Withdrawal of adequate coverage by insurers.
  • Failure to locate an insurer willing or able to underwrite a risky property, such as one located in an area where natural disasters are common or in high-crime areas.
  • Insufficient coverage under existing property insurance policies.

If any of these scenarios occur, the lender’s own financial assets may be at risk. From about the 1960s, most mortgages contain language allowing the lender to obtain insurance policies of their own on properties. In most cases, the lender is the only beneficiary of such coverage. In the event of a claim, the lender can choose to share proceeds from the force-placed insurance policy to help the borrower – the property owner – repair a damaged property. J.B.Lloyd & Associates, a Division of U.S. Risk, LLC, offers lender-placed hazard and flood coverage designed to provide robust protection for a range of potential claim scenarios.

How Does Force-Placed Insurance Work?

If a lender must obtain insurance on a property to protect its interests, insurers and mortgage borrowers must understand several factors. First, this insurance is only designed to cover the amount due to the lender. However, many force-placed policies offer the option of so-called “replacement coverage” if a property is lost due to fire or other covered peril. Second, force-placed insurance tends to be more expensive than similar policies obtained by the homeowner as mortgage insurance, and may offer less coverage for the price. Because of the risks inherent in the lending and mortgage servicing process, insurers sometimes charge higher annual premiums to help recoup any losses resulting from a claim. Additional costs of force-placed insurance typically appear in future mortgage payments, driving them up.

If a property becomes damaged or is lost, the lender with a force-placed policy files a claim just as with typical homeowner insurance. Depending on the policy language, the lender may recover the amount left due on the mortgage or may be able to recover replacement expenses.

Options for Financial Institutions and Mortgage Servicers

The typical force-placed insurance policy provides very basic protection, only covering the remaining amount due on a given property loan. This basic coverage may not be sufficient for lenders, however, so insurers have rolled out a series of options. Options in available force-placed insurance policies include:

  • Coverage for entire real estate investor portfolios.
  • Replacement coverage if a structure is lost.
  • Both residential and commercial property coverages.
  • Options for unique risks such as natural disasters (flood, earthquake, fire) and certain business liabilities experienced by the lender.
  • Risk management services.

Lenders have a legal obligation to ensure continuous and adequate insurance coverage for the properties they finance. J.B. Lloyd & Associates, a Division of U.S. Risk, LLC lender-placed insurance serves as a viable solution; it protects the financial interests of lenders. Even with the added expenses associated with such policies, homeowners ultimately benefit as well. This coverage can eliminate the uncertainty of a lapse in mortgage insurance or inadequate coverage, protecting the assets of lender and borrower alike.

About U.S. Risk

U.S. Risk, LLC. is a wholesale broker and specialty lines underwriting manager providing a wide range of specialty insurance products and services. Headquartered in Dallas, Texas and operating 16 domestic and international branches, U.S. Risk and its affiliates would like to help you access a world of new markets and products. For more information, contact us today at (800) 232-5830.