Force-Placed Insurance: Homeowners Beware
Your mortgage lender could force you to buy overpriced insurance you don’t even need
Florida resident Paul Sullivan, a reporter for the New York Times, remembers the day he received a puzzling letter from his mortgage lender asking that he and his wife provide proof of flood insurance. They did so, but three months later, they discovered they were being charged for bank-imposed flood insurance that the lender chose — and that cost a pretty penny. Try as they did, they couldn't get the lender to quickly remove the insurance and charges.
Welcome to the topsy-turvy world of force-placed insurance. In this world, a bank or other mortgage holder forces you to buy home or specialized insurance (such as flood insurance) if you don’t have it, you have what the lender considers inadequate coverage or your policy has lapsed.
The problem, Sullivan notes, is that force-placed insurance is much more expensive than regular home insurance — up to 10 times the cost of a normal policy, according to the national law firm Gilman Law. It also covers much less, often omitting coverage of personal items or owner liability, according to the National Association of Insurance Commissioners (NAIC). And in the case of Sullivan and many other homeowners, some lenders appear to be forcing this high-priced insurance on homeowners who don’t need it.
Sometimes the force-placed policy is specialized, like wind or flood insurance, even though the homeowner may not live in an area prone to flooding. If you don’t pay for the force-placed insurance, the lender can foreclose on you, according to the NAIC, which is taking a critical look at such policies.
Complaints and class-action lawsuits
Complaints about force-placed insurance have dogged lenders in many states, with major lenders accused of colluding with insurance companies to charge excessive rates, according to the New York Times. Several recent class-action lawsuits have charged that some insurance companies offer “kickbacks” to a bank in exchange for providing customers who are forced to buy more expensive homeowner’s insurance from the lender.
One class-action lawsuit in 2012 against Wells Fargo and insurance company QBE alleged the companies overcharged more than $50 million in insurance premiums affecting 20,000 homeowners. The suit alleged that Wells Fargo and QBE inflated the premiums for force-placed insurance and that QBE paid commissions to Wells Fargo. In his opinion, Judge Robert Scola, Jr., of the U.S. District Court of the Southern District of Florida, wrote that Wells Fargo had actually threatened to retaliate against homeowners who join the suit, a claim the bank denied.
Bank of America also settled a $31 million class-action suit concerning force-placed insurance last fall in Oregon. The suit alleged the bank sent letters to borrowers telling them they carried insufficient flood insurance because they lived in special flood zones. But there is no federal requirement for homeowners living in the affected areas to carry additional insurance, the suit claimed. Bank of America also allegedly ignored proof sent by the plaintiffs showing they had already had the flood insurance the bank required.
What to do if a mortgage lender forces insurance on you
The New York Department of Financial Services recommends that you take the following steps.
- Don’t ignore letters from your lender, since fees and penalties may build up quickly.
- If your home insurance lapsed, get a new policy or reinstate your old policy immediately.
- Send proof of your new policy to your lender and ask that the force-placed insurance be cancelled as soon as possible.
- Continue paying premiums on the forced-placed insurance until the matter is resolved.
- In the event of a dispute, send a Qualified Written Request (QWR) to the lender. A QWR is a formal demand to obtain information about your loan and to challenge a dispute on its management. The U.S. Department of Housing and Urban Development has a QWR form on its website.
- If your original policy was cancelled because your lender did not make timely payments from your escrow account, you may want to talk to a lawyer or contact your local Legal Aid office.
If you provide proof of insurance, the lender must stop the force-placed insurance and refund any charges for the time you were covered by your own policy, according to new rules enacted by the Consumer Financial Protection Bureau in 2014.