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Force-placed insurance: High-cost home insurance policies under the microscope
The little-known practice of "force-placed" home insurance is increasingly being assailed as unnecessarily costly and often harmful to homeowners.
Force-placed insurance, which sometimes is called "lender placed," can be imposed after you've let your homeowners insurance lapse. That commonly happens when you fall behind on the mortgage and your lender no longer pays the premiums to your insurer from your escrow account.
Your bank or lender, citing the need for the property to be protected against a loss, then can buy another insurance policy and "force" it on you - along with the associated payments, which are often higher significantly higher than for a policy you'd buy on your own.
But the practice is highly controversial.
On April 5, 2012, New York's Superintendent of Financial Services, Benjamin M. Lawsky, announced a new probe into force-placed insurance and its excessive rates. His department found that force-placed insurers are paying out little in claims compared to the premium dollars they take it. One insurer pays out as little as 20 cents for every premium dollar charged.
Jeffrey Golant, a Florida attorney who has represented homeowners who feel they've been unfairly force-placed by lenders, says most people aren't aware of the process.
"In my opinion, there are many, many people who are completely victimized by this," he says. "They may not know it can affect them [and are] surprised when it does."
A recent Reuters article says that government-controlled Fannie Mae hopes to reduce such costs to homeowners by overseeing the policies itself.
Chorus of complaints
Some government officials are responding to growing complaints about force-placed policies. Richard Cordray, director of the federal government's Consumer Financial Protection Bureau, says his agency will propose rules sometime this year restricting the practice. The aim, he noted in a speech to state attorneys general in early March, is "to prevent [mortgage] servicers from charging for this product unless there is a reasonable basis to believe that borrowers have failed to maintain their own insurance."
New York is at the forefront of tackling this issue. Benjamin M. Lawsky, the superintendent of the New York State Department of Financial Services, recently directed his office to start an investigation into several large financial firms to determine if they fraudulently pushed homeowners to buy the force-placed coverage.
The probe is ongoing, but The New York Times reported in early January that companies under investigation include JPMorgan Chase, Bank of America, Citigroup and Wells Fargo.
On the West Coast, Dave Jones, California's insurance commissioner, has asked the major insurers who sell force-placed coverage to lower their rates for such policies.
In calling for the rate reductions, Jones said in a news release that the insurance department's review "of the forced-placed insurers" loss ratios -- the percentage of every premium dollar an insurer spends on claims -- found that the loss ratios are low, which typically points to excessive premiums and is evidence to support complaints about the absence of arm's-length transactions between lenders and forced-placed insurers."
Insurance industry justifies force-placed practices
While accepting that it makes sense to review force-placed policies and their pricing, the insurance industry says the practice is reasonable when considering the financial risks involved if a home or property is not fully protected.
"You have to keep in mind that there needs to be a way for lenders to protect their interest in the home or property if the homeowner has fallen behind on payments," says Michael Barry, a spokesperson for the Insurance Information Institute. "The lender has a stake in the property and shouldn't have to face a partial or total loss" if there's damage.
"Are the premiums [for force-placed insurance] too high? That's the big question, and it looks like [regulating agencies] are determining that," says Barry.
What can you do about it?
Golant and other lawyers say there are steps homeowners can take to avoid being force-placed:
- Don't fall behind on the insurance payments for your property and be sure to keep up with your mortgage if your insurance premiums are paid from an escrow account.
- If you are force-placed, keep all your documentation in order. You may need it if you seek legal help. All communications with your bank or lender should be in writing, preferably through certified mail, so you'll have a written record.
- If you think you've been unfairly force-placed, don't hesitate to contact your state's department of insurance and ask for a review of your situation.
Golant also recommends alerting your state and federal representatives to the problem.
"Any way you can get [those in power] to know your problem and what is affecting many others, well, that seems reasonable to me," he says.