If I offered to take away your current homeowners insurance policy and replace it with one costing three times as much, you'd say "no." But what if I did it anyway? And, what if you didn't find out about it until you got the bill?foreclosure2

This is a position in which thousands of homeowners find themselves. They've been saddled with costly property insurance policies at a time when they can least afford it. These annual premiums, often totaling thousands of dollars, could force them into foreclosure and precipitate the loss of their homes.

I find it ironic that at a time when insurers are competing aggressively to offer you car insurance at lower rates, a small sliver of somewhat obscure insurers are racking up huge profits right under the noses of supposedly vigilant regulators. It's a result of an incestuous relationship between these insurers and the banks or lending institutions with which they deal, coupled with the financial weakness of their victims. Unfortunately, it lets them gang up and prey on homeowners.

Name change shouldn't mean game change

This type of insurance is called force-placed, but the insurers prefer to call it lender-placed so they won't look like bullies. Here's how it works. The account of a homeowner delinquent on mortgage payments is red-flagged by the lender. Mortgage payments, home insurance and property taxes are often bundled together, and if one account falls short, the others could too. In case the homeowner is late, the lender is permitted to keep an escrow account, and if that is drained, it raises yet another red flag.

When this happens the lender goes to a specialty insurer and takes out a new homeowners policy, usually at a much higher premium. But this policy protects the lender, not the homeowner, who can be forced to pay for this costlier policy until the home is foreclosed on and the owner thrown out.

Justified or gouging?

The New York State Department of Financial Services recently held hearings at which witnesses described how lenders and insurers conspire to gouge consumers. In some instances, homeowners don't even know they've been force-placed until they get the new insurer's bill, all the while paying their old insurer. The cost of force-placed insurance is huge. One woman testified that she paid three times as much to the new insurer as she did for her State Farm policy. And homeowners find themselves caught in a vice if they complain; their calls are answered by the lender, not the insurer.

Virtual monopoly

New York regulators pointed out that two companies, Assurant and QBE, control 90 percent of the state's market, and that their so-called rates were virtually identical. These insurers pay commissions and fees up to 75 percent of their premiums back to the lenders. And while commissions aren't illegal, state officials were skeptical. "It sounds to me like the lenders are saying, "This is the cost of doing business with us,'" said New York's first Superintendent of Financial Services Benjamin Lawsky, who presided over the hearings.

Perhaps this is the reason that major insurers such as Chubb, State Farm and Travelers avoid this market. It smells rotten. And it gets worse.

Insurers often buy reinsurance to protect themselves from extraordinary expenses. Assurant buys reinsurance from a Vermont-based unit of J.P. Morgan, the same company that buys its force-placed insurance. Or in other words: one hand washes the other. It provides huge profits for the insurers who have taken the lead in this market. From 2004 to 2010, Assurant's premiums in its force-placed unit have soared to $5.5 billion from $1.5 billion. QBE's unit rose nearly sixfold in even less time.

Black-eyed insurers

Lawsky oversees New York State's banking, lending and insurance industries, and made it clear that he intends to rein in insurance abuses without taking away the ability of banks to insure properties in default.

Having covered this market, I wonder why the major property casualty insurers themselves don't do something about it. Their reputations suffer when they are viewed as helping force homeowners into foreclosure. The new regulations that Lawsky is talking about to control rates and prices may come back to haunt them, as well as the guilty parties. And every time a force-placed insurer takes over, they stand to lose a client and a premium.

If a bank does force-place you when you don't deserve it, see a lawyer and get out of this toxic product and back into standard insurance as soon as possible. Lawsky noted that all the witnesses who'd testified had already done so. A lawyer will likely cost you less in the long run than being force-placed.