December 9th, 2020
For lenders, one of the most significant risks to their collateral occurs when a property owner allows their insurance coverage to lapse. If the property is damaged or destroyed due to fire, windstorm, vandalism, etc., without a valid insurance policy in place, the homeowner may not be able to afford to repair or rebuild. In addition, the value of the lender’s collateral is severely diminished; then default and foreclosure of the property may soon follow.
The solution to managing this risk often lies in force-placed or lender-placed insurance, which can protect the lender’s interest in the collateral if the property owner fails to maintain an appropriate insurance level. Read on to learn more about what force-placed insurance covers (and excludes), who needs it, and what lenders should consider when evaluating their force-placed insurance options:
WHAT IS FORCE-PLACED INSURANCE?
As the name implies, force-placed insurance is based on the lender’s contractual right to place insurance on a property after the homeowner’s insurance policy has lapsed or expired, and to charge the insurance premium cost to the borrower’s loan balance. Although force-placed insurance may provide some indirect protection for the homeowner, it’s designed to protect the lender’s collateral; not the homeowner’s assets.
WHAT DOES IT COVER?
Force-placed insurance policies can cover residential and commercial properties; also foreclosed properties (known as ‘real estate owned’ or REO), as well as vehicles and other consumer loan collateral. If the loan document requires the borrower to maintain insurance on the collateral asset, the lender can generally force-place coverage when needed. There are several types of force-placed insurance:
Lender-Placed Hazard and Flood Insurance
Lender-placed hazard insurance covers residential (including mobile/modular homes) mortgage properties or commercial mortgage properties, when the borrower fails to insure the property according to the loan terms.
Force-place hazard insurance excludes flood coverage, so a separate flood insurance policy should be placed when the property is located in a flood zone.
Collateral Protection Insurance
This type is lender-placed coverage relates to vehicles and other consumer collateral secured loans, like watercraft, RV, etc., that lacks a current borrower’s insurance policy.
There are also a few aspects that force-placed insurance doesn’t cover. Because force-placed insurance is designed to protect the lender’s interest in the collateral, and not to protect the homeowner from financial loss, force-placed insurance policies will cover only the loan’s balance, not the actual property value.
In other words, if a property is valued at $500,000 and the homeowner only has a few years left on their mortgage with a balance of $15,000, a force-placed insurance policy is likely to provide only about $15,000 of coverage.
Force-placed hazard insurance policies also don’t cover liability claims such as a slip-and-fall claim against homeowners or flood losses. The lender can place liability coverage for its own interest once the property is foreclosed. Lenders who would need to protect their collateral against flood damage will need to place a force-placed flood insurance policy.
WHAT SHOULD LENDERS CONSIDER WHEN COMPARING FORCE-PLACED INSURANCE OPTIONS?
In most cases, a mortgage loan agreement, or other sales finance contract, will spell out when and how the lender can force-place insurance on the collateral. Many loan agreements specify that the cost of any force-placed insurance may be collected from the homeowner. If the collateral asset is expensive to insure, the lender often has the right to foreclose or repossess the asset.
Two other factors lenders should consider:
- Whether to outsource their insurance tracking or whether to internally monitor and track the properties’ insurance status in its portfolio. Monitoring every property’s insurance status in a lender’s portfolio can be inefficient and time-consuming. Delegating this task to a third-party can free up a lender’s time and energy for more profitable tasks.
- Force-placed insurance can be cancelled when the borrower again purchases their own policy. When the force-placed insurance is cancelled, a full or partial refund must be processed quickly and efficiently to stay in compliance. A system like Lee & Mason’s mortgagehazard.com makes it easy to cancel force-placed insurance and to initiate the refund process.
LEE & MASON CAN MAKE A DIFFERENCE
Lenders who want to avoid monitoring insurance can outsource their coverage tracking, while those who prefer the DIY tracking approach can use mortgagehazard.com to check their insurance statuses 24/7 on Lee & Mason’s system. If you’d like more information about force-placed insurance or want to learn more about what we offer, get in touch with Lee & Mason today!