A lender (often a bank or credit union) takes a risk when providing a homebuyer with a loan. After all, the bank’s financial stake in a property may outweigh the borrower’s for many years to come, making it important for lenders to ensure that their interest in a property is protected. Most lenders have specific insurance requirements spelled out in their loan documents. If a borrower fails to maintain adequate coverage, their lender may institute what is known as a force-placed flood insurance policy.
Force-placed insurance, also known as creditor-placed, lender-placed or collateral protection insurance, is insurance coverage a lender or loan servicer may place on a property when a borrower’s policy is cancelled, has lapsed or coverage is deemed insufficient, and no replacement policy is in position. Force-placed policies remains in place until proof of replacement coverage has been received by the lender.
Homeowners who are required to purchase flood insurance but fail to do so, may be force-placed into a flood insurance policy by their lender. Although a force-placed policy may provide some indirect coverage for the homeowner, its purpose is to protect the lender’s collateral, not the homeowner’s assets. So, while these kinds of policies are important for lenders to safeguard their financial interest in a property, force-placed policies come with draw backs for borrowers.
In general, lender-placed policies have limited coverage for borrowers. Policies generally do not cover personal items and coverage limits rarely exceed the lender’s financial interest in a property. So, if your home’s replacement value is $200,000 but you only owe $65,000 your force-placed policy will likely have a limit of $65,000. In addition, force-placed flood insurance is usually much more expensive than a policy you might obtain by shopping for insurance yourself. The premium is typically added to your monthly mortgage amount which could cause your payment to go up unexpectedly. For those already struggling to keep up on their mortgage payments, this could be particularly problematic. Since most of us don’t want to pay higher premiums for less coverage, there are a few things you can do to avoid force-placed insurance.
Make sure you understand your flood insurance requirement and see that you have adequate coverage in place.
Review your mortgage agreement and insurance policies thoroughly so you have a firm understanding of the terms being offered.
Read any notices you receive from your mortgage or insurance company right away.
Make sure your insurance premiums are paid on time. If your payment is being made from your escrow, follow up with your bank or loan servicer to confirm that the payment information for your policy matches what they have on file for your account.
If you find yourself with force-placed flood insurance coverage, contact your insurance agent as soon as possible to get a new policy or for help reinstating your old one. Once a policy is in place, submit proof of coverage to your lender and ask them to cancel your force-placed policy.
If you need a policy, get an instant flood insurance quote online. We’ll help you find the right coverage at the best price.
