What is Force Placed Insurance?

When people take out a residential mortgage, one of the basic requirements found in their mortgage agreement is that they maintain insurance coverage on their property. However, this does not mean all borrowers do so or will continue to do so. If a borrower fails to live up to their end of the bargain regarding insurance, their lender will instead obtain insurance to protect the lender's interest in the property should it sustain damage or be destroyed.  Known as lender-placed or force-placed insurance, it's a much more critical component of the nation's mortgage finance system than most people realize.

What Does Force Placed Insurance Cover?

While the main purpose of the insurance is to have financial support in place should the home be damaged or destroyed, it is important to note that this insurance is most common in situations where the borrower has financial difficulty, the home has been abandoned by the homeowner, or the borrower is in the early stages of foreclosure.

Unlike home insurance policies that are purchased by homeowners, lender-placed insurance is designed mainly to protect the lender's interest in the property. Thus, rather than having as its main priority to protect the homeowner from financial loss, lender-placed insurance aims to protect the mortgage lender's financial interest in terms of collateral.

Another important feature of lender-placed insurance is that it helps to remove risk for not only homeowners, but also lenders and investors. In fact, keeping its investments safe and helping financial institutions comply with the regulations is why Red Rock offers lender-placed insurance. By eliminating the risk of uninsured losses, Red Rock knows that lenders, investors, and, of course, homeowners will all benefit should the borrower's primary insurance lapse or cancel. 

Are You Protected with Force Placed Insurance?

Yes. Although you may initially believe lender-placed insurance protects only the mortgage lenders and investors from financial losses, homeowners do still gain significant protection through lender-placed insurance. In fact, one of the biggest advantages of LPI is that it can be used to protect any home, even if yours is located in an area deemed to be at high risk for floods, fires, or other similar situations.

Remember, you as the homeowner always have the right to obtain your own insurance, and mortgage lenders actually prefer you do so and maintain adequate coverage on your property. LPI is obtained only when it is deemed to be absolutely necessary, yet does support your home ownership by ensuring your property will always be protected.

Why is Force Placed Insurance Necessary?

Primarily, lender-placed insurance is necessary to protect the financial interests of the mortgage lender. Should your home be damaged or destroyed while it is uninsured, insurance coverage will not be available to help pay for making repairs or rebuilding. If this happens, the mortgage lender would then sustain a huge financial loss on the property, as would the company's investors.

Are Lender Placed Insurance and Force-Placed Insurance The Same Thing?

Yes, LPI and force-placed insurance are the same types of insurance. However, most modern insurance companies and mortgage lenders do not prefer to use the term "force-placed." Remember, LPI is never actually forced onto a homeowner. Along with agreeing to maintain insurance coverage when they obtain their mortgage, homeowners also can purchase their own home insurance at any time. Should you find yourself requiring LPI, you should receive at least two letters from the mortgage lender reminding you of your obligation to maintain insurance coverage. In any case, you should get a minimum of 45 days notice before LPI would be purchased for your home.

Is Force Placed Insurance More Expensive?

Generally, lender-placed insurance is usually more expensive than a standard home insurance policy purchased by a homeowner. However, you must remember there are valid reasons for this price difference. First, LPI can be issued for any property, regardless of its condition. Also, it is used for properties located anywhere, even in the most high-risk areas. Since insurance companies that choose to underwrite lender-placed insurance policies have a much higher risk of potential claims from natural disasters, the added expense is necessary to offset potentially higher costs down the road.

Are You Required to Accept LPI?

As a homeowner, you are required to accept LPI once it is verified you do not have your own insurance protection for your property. Since you agreed to maintain insurance on your home throughout the duration of your mortgage, LPI will be used until you choose to purchase private insurance coverage for your home. Once you do, the LPI policy will be canceled by your lender, provided you can show adequate proof of insurance. When you do so, you will be given a refund for any overlaps in these premiums.

Is LPI Regulated?

Just like other types of insurance, LPI is regulated at both the state and federal levels by various consumer protection laws. At the state level, the National Association of Insurance Commissioners requires all insurance companies to submit LPI data on an annual basis. At the federal level, LPI is regulated by both the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and the Flood Disaster Protection Act. Thus, if you have any questions concerning the purchase of LPI for your home, your mortgage obligations regarding the maintenance of insurance on your property, or how an LPI policy is terminated and how you would be entitled to refunds, you can look to these state and federal laws for answers.

Are LPI Policies Very Common?

While you may assume many properties have LPI policies, the fact is, the number of properties with this type of insurance is very low. In fact, no more than two percent of all properties mortgaged in the U.S. have LPI coverage in place.

If you have received notice from your lender that an LPI policy may soon be put into effect on your home, make sure you understand all aspects of this insurance coverage. Remember, while you need to be protected from financial losses, it's just as important that lenders be able to manage risks and reduce costs, since this will enable them to provide homeowners with better service.

Red Rock Financial offers lender-placed insurance solutions for financial institutions. For more information, please fill out our contact form.