What Is Forced Placed Insurance?
Forced placed insurance exists to protect lenders, and it’s sometimes called lender placed insurance. Forced placed insurance can be purchased by a lender to cover a home, an auto, an RV, and even boats and planes. This type of insurance is bought by the lender when a consumer’s policy lapses, gets cancelled, or is non-renewed.
How Does Forced Placed Insurance Work?
The lender buys the insurance, but the consumer will pay for it in the end. The costs of forced place insurance will be tacked on to their mortgage or car payment.
Most importantly for consumers, forced placed insurance does not include any liability coverage. It does not meet your state’s minimum auto insurance requirements. It only exists to protect the lender.
Like all insurance topics, force placed insurance can be complicated. This article will answer questions for both consumers and lenders. We’ll discuss:
- Force placed insurance illustrated through a story
- Understanding force placed insurance coverage
- Lender placed insurance requirements
- The costs of forced placed insurance
- Forced placed insurance for autos
- Force placed homeowner’s insurance
- Force placed insurance topics for lenders
- How to find a force placed insurance letter template (for lenders)
Let’s start by illustrating how forced place insurance works.
The Story of Zachary: When Financial Disaster Strikes
Zachary is a hard-working young man. At 24, he has a nice apartment, an adorable wife named Helen, and a good job with a small company that looks promising. Nature takes its course, and Helen gets pregnant. Everyone is thrilled!
The couple decides they need a more reliable vehicle, so they choose a gently used minivan from a local dealer. As they sign the papers to buy the minivan, the sales rep explains that they must always carry full coverage auto insurance.
Helen’s pregnancy progresses nicely, and the world looks rosy for a few months, until a pandemic strikes. Zachary loses his job, and the health insurance provided by his employer. They’re forced to buy health insurance. Their savings account dwindles as they prepare for the new baby, and Zachary’s unemployment income isn’t enough money.
The baby is born, and suddenly Zachary and Helen find themselves spending a lot of money on diapers, baby formula, baby clothes and the like. One day, they’re forced to choose between buying formula, or paying their auto insurance bill. Naturally, they buy the formula to feed their infant.
Their Auto Policy Lapses
Their auto insurance policy lapses. In other words, the auto insurance company cancels the contract due to non-payment. The insurer sends a letter to the lienholder — the bank which loaned them the money to buy the minivan —and the lienholder buys force placed insurance to cover the vehicle in case it is stolen, damaged or totaled.
The lender doesn’t wish to lose money on this loan, so they tack on the cost of that insurance policy, and the administrative efforts it took to get it, to Zachary’s loan. His next car payment is going to be a lot more.
And remember, that force placed insurance policy doesn’t cover any liability. If these exhausted new parents cause an accident, they are financially responsible for all the damage they cause.
A Force Placed Insurance Policy Can be Canceled with Proof of Insurance
In a perfect world, Zachary finds a new job right away. He is able to find a new full coverage insurance policy, and he pays a little more now because of that lapse. He contacts the lender with proof of insurance, so they remove the force placed auto insurance policy.
In a disastrous situation, Zachary is unable to find employment. The auto loan payments keep increasing every month, until he is unable to pay them at all. His car is repossessed, and his credit rating tanks. The financial struggles spiral out of control, as he is unable to look for work without a vehicle.
Understanding Force Placed Insurance
Force placed insurance protects a lender, so they don’t lose huge sums of money for the loss of valuable assets like cars, homes, boats or recreational vehicles. It does not supply liability protection for consumers, and it does not meet the basic liability limits required by your state.
Force Placed Insurance Coverages: What Does Lender Placed Insurance Do?
Lender placed insurance coverage varies, depending on the asset insured.
Force Placed Insurance Coverage for Autos
There are several entities that may loan you money to buy a car. We’re talking about banks, credit unions, and even private individuals. For the purpose of this article, we’ll use the term “bank” to cover all these types of lienholders.
As a private consumer, when you enter into a contract for a car loan, the bank will require that you carry full coverage auto insurance. If the car is stolen or totaled, the bank will be compensated for the car. If it’s damaged in an accident, the insurance will pay for repairs.
Forced placed insurance for autos will cover:
- Damage caused by collision
- Comprehensive coverage (things like hail damage, lightning damage, a falling tree limb)
- Flood damage (this is important for force placed insurance in Florida)
- Fire damage
If your auto policy lapses, or if it’s non-renewed by your insurance company because you have several claims or a DUI, you must find another full coverage policy. If you don’t, the bank will buy a force placed insurance policy, and they’ll add those costs to your loan amount.
Know that force placed auto insurance is more expensive than your regular insurance policy (and it doesn’t cover your liability at all.) Your car payment will increase, and the costs can be significant.
The bank doesn’t care how much force placed insurance will cost, so they won’t be shopping for deals. As licensed insurance agents, we’ve heard horror stories of forced placed insurance costing $1,200 per month, for small, inexpensive vehicles. In short, a few months of lender placed insurance can wreak havoc on your finances.
Force Placed Homeowners Insurance Coverages
Force placed homeowners insurance works much the same. When you enter into a mortgage contract with a bank, they will require that you carry homeowner’s insurance until your home is completely paid off. This protects the bank, and eventually the consumer, in case of a major loss.
Homeowner’s insurance policies always include fire coverage. A force placed home policy will cover other perils like:
- Smoke damage
- Civil unrest and riot
- Malicious mischief and vandalism
Flood coverage and earthquake coverage usually need to be bought separately. This leads nicely into our next section, on lender based insurance requirements.
Lender Based Insurance Requirements
When buying a home, your bank may require that you carry specific insurance beyond a traditional homeowner’s policy. Usually, this means flood insurance.
If your mortgage contract requires you to carry flood insurance, you must do so, until the mortgage is completely paid off. Otherwise, the lender can buy flood insurance, and pass that cost on to you, plus some administrative fees. This can be extremely expensive, we’re talking about thousands of dollars per month, depending on the home and the amount of insurance.
The bottom line is this: if a lender requires you to carry insurance for anything, whether it’s a home or a motorcycle, make that premium payment a priority. Otherwise, the costs get out of hand quickly.
The Costs of Force Placed Insurance
Per the Consumer Financial Protection Bureau (CFPB), force placed insurance will almost always cost more than your standard insurance policy. Remember, your bank doesn’t care how much this policy costs, they aren’t shopping for deals.
This cost will be passed on to you, and the bank can charge you extra for the administrative effort it takes to find and bind a policy.
The costs of force placed insurance will vary based on many details. Check out the table below for more insight.
|Type of force placed insurance||Points an insurer may consider||Points that don’t matter to an insurer|
|Force placed auto insurance||· Value of vehicle|
· Loan balance
· Garaging location
· Average repair costs
· Incidents of theft for this make/model
· Incidents of theft in your neighborhood
· Total weight of vehicle
· Top speed of vehicle
· Driver claims history
|· Monthly payment amounts|
· Consumer credit scores
· Liability coverage
|Force placed homeowner’s insurance||· Value of home|
· Current labor costs
· Current material costs
· Square footage of home
· Claims history at this location
· Claims history in the neighborhood
|· The value of personal belongings|
· Liability coverage
Remember, liability coverage is never included in a lender placed policy. This is important, because if someone is injured at the property, this type of insurance will NOT protect you from a lawsuit, nor will it help to pay for someone’s injury.
Let’s talk more about force placed insurance policies for homes and autos.
Forced Placed Insurance for Autos
So far, we’ve discussed how force placed insurance might arise in a consumer’s life. Usually, it happens because someone experiences extreme financial difficulties, like in our story about Zachary and Helen, above. It’s vital that consumers avoid force placed policies, whenever possible. They’re expensive, and they don’t provide any liability protection.
Is there a benefit of forced placed auto insurance for consumers? Yes. If you buy a vehicle, and find yourself in a financial upheaval, this type of insurance protects the lender, so it could protect you from a major loss.
For example, imagine that you find yourself unable to pay your car insurance premiums because you are hospitalized for an illness. The lender buys insurance on your behalf.
Your car is stolen from the hospital parking lot. The force placed insurance pays the lender for the vehicle (or pays for most of it), and you aren’t forced to make a car payment on a vehicle that’s gone forever. In this situation, you’ll be glad that force placed insurance exists.
Force Placed Homeowner’s Insurance
Again, consumers find themselves coping with a force placed home policy because they’re experiencing major financial duress. If you find yourself hospitalized, for example, and unable to pay your homeowner’s insurance premiums, your mortgagee (the lender) will buy insurance on your behalf. That cost will be passed on to you, and your mortgage payment will increase considerably.
Imagine that your home gets struck by lightning while you’re hospitalized, though. The lightning causes a fire, and the entire home burns to the ground. That lender placed insurance policy will pay off your home. So, you aren’t stuck paying a mortgage on a home that no longer exists. The lender is made financially whole. That’s the great news.
The bad news is that a force placed homeowner’s insurance policy will not cover your personal belongings.You’ll need to start fresh, with everything from clothing to bedding and furniture. It won’t cover any other expenses, like additional living expenses covered by a traditional homeowner’s policy, either. But at least you aren’t paying for a home that burnt down.
Now that we’ve covered everything a consumer should know about lender placed insurance, let’s address some lender concerns about placed insurance.
Force Placed Insurance Topics for Lenders
First things first. If you’re a lender, your contract must include a clause saying the consumer must carry full coverage insurance. The specific laws and legal terms vary from state to state, but if insurance is not discussed in your contract, you cannot enforce it.
Secondly, lenders must notify consumers of their intent to force place an insurance policy. You must do so in writing, and proof of mailing is important. You don’t need to send a certified letter, but you should keep a copy of the document, a copy of the envelope, and the receipt for postage.
Force Placed Insurance Letter Templates
The CFPB supplies this force placed insurance letter template, and more information about how to fill it out, online. You’ll need to fill in the specific details about the particular property involved, and mail it to the consumer.
There are other templates available online, just perform a few internet searches until you find the one that suits your needs.
A Final Note on Force Placed Insurance
Force placed insurance can be extremely expensive, and it should be avoided if possible. Remember that it doesn’t provide any liability protection. If you’re caught driving with this type of insurance, you may get a ticket and face significant fines, depending on your state.
However, a lender placed policy can protect you from a financial disaster, because it protects the bank.
Ultimately, your best course of action is to always pay your insurance premiums on time.