June 30, 2019
With natural disasters (and their associated property damage) becoming increasingly common, force-placed insurance is more important than ever for many lenders. But what exactly is this type of policy? What does it cover, and when do you need it?
Sometimes referred to as lender-placed, creditor-placed, or collateral protection insurance, force-placed insurance is a policy purchased by a lender or loan servicer to protect its own collateral. If the property owner’s insurance lapses for any reason, damages sustained during this period may not be covered — and just a few uninsured property losses can adversely affect profitability of lender’s loan portfolio.
Force-place policies may be written on variety of property risks. Commonly, lenders will place insurance on both uninsured residential and commercial properties. Foreclosed properties, whether residential or commercial, will also need force-placed insurance. Plus, the lender will want to place general liability coverage on the property at the same time, protecting the lender as owner of foreclosed property from liability claims, like common slip & fall claims.
Equally as important to the lender is need for force-placed flood insurance, which is required by federal regulators to be placed on mortgage properties identified as being located in a flood zone. Residential or commercial properties in flood zones that don’t have flood insurance (or don’t have enough flood insurance) need a force-placed flood policy.
Auto collateral and other consumer loan collateral may need force-placed insurance to cover uninsured vehicles in their portfolio. This is particularly true for portfolios where blanket single interest or VSI is not a suitable option.
The right to force-placed insurance is generally provided for in mortgage loan agreement itself or in the sales finance contract in the case of an auto loan. In exchange for funds to purchase the property, the lender has security interest in the collateral. Once the lender has identified the property as uninsured, the lender will want to immediately place coverage back to the date of cancelation or lapse, so there is no gap in coverage of the property.
If the borrower again buys his/her own property insurance, the lender will get a full or partial refund of the force-place insurance premium. For example, a partial refund occurs when a borrower’s policy lapses on January 1st, but they don’t replace coverage with a new policy until March 15th. Thereby, the force-place policy was needed for two and half months; the remainder of the annual premium refunded on a pro-rated basis. If the borrower replaced his insurance with a new policy effective back to January 1st then lender, and thereby the borrower, would receive a full refund called a flat cancelation refund.
Though force-placed insurance is generally more costly than owner-purchased insurance, it doesn’t provide the same extensive coverages. For example, most force-placed insurance policies are written to cover the balance of the loan; not the value of the property, which may be higher. The force-place insurance policy does not cover liability claims against the borrower (owner of the property), like the common slip and fall claims mentioned earlier.
It’s important to remember the force-place hazard insurance doesn’t cover flood losses. (Force-place flood is required to cover flood exposures.)
Ideally the borrower will keep insurance on his property in force throughout the course of the loan. But in reality, a small number of borrowers do let their insurance cancel or lapse for non-payment of premium. It’s important that the lender have an easy way to protect their interest in the property. Lee & Mason’s mortgagehazard.com system or our full outsourced tracking option make it easy for the lender to place the coverage they need, when they need it.
An insurance policy can lapse or be canceled at any time. Lenders have to either maintain an internal system of monitoring property insurance and then force-place on their own, or they can outsource the tracking of insurance. If the lender is doing its own monitoring, using mortgagehazard.com is the solution. If the lender wants to get away from monitoring insurance, outsourcing coverage tracking to Lee & Mason makes the most sense.
For more information about force-placed insurance, contact Lee & Mason today!
Sometimes referred to as lender-placed, creditor-placed, or collateral protection insurance, forced-placed insurance is a policy purchased by a lender or loan servicer to protect its own collateral.
Blanket Lenders Single Interest protects the lender from uninsured damage or theft of the loan collateral, occurring before or after repossession.
Lender-placed hazard and flood insurance can cover residential/commercial properties and mobile homes whenever the borrower fails to insure the property.
Collateral Protection Insurance is lender-placed coverage on unsecured collateral which has no insurance policy. It protects the lender’s loan balance in case of loss of collateral while uninsured.