The lender creates the escrow account to cover the RENEWAL costs of an already existing hazard insurance policy obtained by the borrower before closing. If the policy is ever canceled or non-renewed AND the borrower fails to secure a replacement policy, then the lender will have no choice than to purchase a “forced placed” policy. The premium costs are higher for a few reasons:

Lack of property inspection. The FP insurer will provide protection for any property requested by the Lender. This means every junked out, poorly maintained or vacant property facing risks of exposure to vandals, squatters, etc.These are properties no voluntary hazard company would ever insure.Questions of pre-existing damage and cause of loss are sometimes overlooked, giving benefit of the doubt to the Lender.
Coverage for “intentional” loss if carried out by the borrower. Most FP policies do not exclude coverage for intentional acts unless carried out by the insured (Lender). This means the borrower can commit arson or vandalism when leaving the soon-to-be foreclosed property and the Lender will be able to collect the indemnity payments.

Are the FP policies beneficial to borrowers? Of course not. That is why borrowers have the right to purchase their own policy coverage with any insurer, as long as the lender’s rights are protected under a mortgagee clause or lenders loss payable endorsement. In some areas of the country, the cost for FP may be cheaper than hazard policies (consider FL). All the borrower has to do is purchase a “renters” policy for protection of contents, ALE and liability. Also, consider the other perils that hazard companies are excluding: wind and and flood along hurricane stricken areas of the country. These wind and flood policies are also available for purchase by the Lender. Finally, some FP policies are written to benefit both Lender and Borrower – these are known as “Dual Interest” policies. The Borrower’s equity may be protected up to the policy limits of the FP policy. This may not be equal to the full market value of the home but something is better than nothing if your home burned down to the ground.

The only time I would even consider faulting the lender for a lack of due diligence is if they fail to issue timely renewal payments to the hazard company, thus resulting in cancellation of the policy because of the non-payment of premium.

My story (ongoing)

I had a lapse on my commercial property for a disputed amount of time between February 2007 and July 2007. Without question, I had a policy by July 2007. My normal rate is less than $1500/month. In September 2007, WAMU took out insurance for me for February 2007 thruough July 2007.

NO future time was covered under the Forced insurance, ONLY a time in the past. $37,000 was the cost.

No rollback provision in my contract so far as forced placed insurance.

What I told WAMU (now CHASE). If WAMU states that every loan customer who has had a lapse is automatically covered by this “retroactive” insurance, I have nothing to say. They will not say that to me. What that means is, once they determine that the building is standing, they get the “retroactive” insurance. That is cherry picking and maybe worse.

joe lee

Generally, lender-placed insurance is coverage to protect against damage to the property being financed or leased only. Liability coverage is excluded.

Yes, lender placed insurance is 2 to 5 times more expensive than your regular insurance policy. For example, when you purchase a homeowners policy, the insurance company who will supply the coverage has the opportunity to gather information on your property. The insurance company evaluates the types of materials your house is made of (wood, brick, stone), where it is located (suburbs, inner city, fault line, flood zone), and what type of environment surrounds your house (river, cliff, lake). After the statistics are gathered, companies do a risk analysis. The premium amount is generated through the underwriting of this risk analysis. With lender-placed insurance there isn’t an opportunity to perform a risk analysis and underwrite a premium tailored to your property. Therefore lender placed insurance is minimal coverage with higher rates than if you had underwriting done on your individual policy.

First some facts:
1)Most, if not all, loan provisions have a clause detailing actions the institution will take in the event primary insurance, which is required as part of the loan agreement, lapses. The idea that a borrower is caught of guard would only be legitimate if they did not read the documents they were signing. Furthermore most contain language stating that the insurance procured will be for the banks benefit only, and at substantially higher cost.

2)In terms of the higher costs of the insurance this is a necessary increase. Banks do not want to place insurance, it is costly in terms of FTE’s and even though most are passed on to the borrower it actually costs them to continuously check for required insurance and then report the necessary properties. Futhermore there is a school of thought that higher lender placed insurance coverage serves as an incentive to the borrower to find better, cheaper coverage elsewhere.

I think we can all agree that occasionally there are unintentional lapses of primary insurance coverage. When this occurs most institutions will only charge for the specific number of days that coverage was required, as most insurance carriers have a pro rata clause.

As far as ways to improve this process perhaps its better to find a solution that already is proven and exists on the market instead of developing a new one that requires substantial involvement by the borrower. A solid case can be made for full blanket, mortgage impairment insurance. Usually mortgage impairment insurance works in conjunction with a bank’s lender placed program but the full blanket, ex-checking variety allows the institution to stop checking for required insurance. Endorsements can be added that then state even if an institution finds a borrower has lapsed coverage, they are still protected. While the bank bears the cost of this coverage, as it is impossible to pass through, the resulting reduction in operational expenses spent tracking and placing provides an offset. The only potential issue is that few insurers allow this to be a dual interest policy, so the borrowers equity may not be protected.

Just a few thoughts,

Chris

Because of what you mention in your article, more than a year ago we started developing a new insurance product to eliminate Force-Placed insurance. And we did. A few months ago we filed 4 patents on a new product that is voluntary, it includes a property and flood policy, and the insurance carrier is Lloyds. We are now ready to sell the product and we are appointing a few Agencies throughout the Country.

The punitive nature of Force-Placed has created a 10 billion/yr. business/monopoly for the Force Placed Insurance Companies that is imposible to break without viable alternatives that benefit the Homeowners.