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Force-placed insurance, also called credit-placed insurance or lender-placed insurance, is homeowners insurance that’s put into place by your lender that you didn’t choose, but still have to pay the premiums for.
This insurance is usually significantly more expensive than the coverage you can find yourself, and it doesn’t protect you from liability or cover your belongings.
Here’s what you need to know about force-placed insurance:
- What is forced-placed insurance and how does it work?
- What does force-placed insurance cover?
- How much does force-placed insurance cost?
- What to do if your lender puts force-placed insurance on your home
- How to avoid force-placed insurance
What is forced-placed insurance and how does it work?
While state and federal laws don’t require homeowners insurance, mortgage lenders do. When you close on a home loan, you sign what feels like 10,000 documents. In one of those pages, you’ll find a requirement from your lender that you maintain home insurance with adequate limits in place on your home at all times. In some parts of the country, lenders may also require flood insurance.
If there’s a lapse in your insurance coverage or you have insufficient coverage, you’ll end up with a force-placed insurance policy. In this scenario, your lender will notify you that it’s going to put a policy in place on your behalf, and you’ll have 45 days to get your own policy and show proof, or you’ll be responsible for paying the premium for the policy the lender chooses for you.
If your insurance lapses, your lender will put a forced-place insurance policy in place on your home. Your insurance can lapse because you fell behind on payments, your insurance carrier dropped you as a customer, or you failed to sign something like a contract renewal on time.
Regardless of which situation you’re in, your insurance carrier will notify you that your insurance coverage is going to lapse by a certain date. Your lender will also send you a notice at least 45 days before the new policy goes into effect. You’ll need to get new coverage in place or contact your lender to continue coverage before your policy ends if you want to avoid force-placed insurance.
You can also end up with a force-placed insurance policy if your insurance coverage doesn’t meet your lender’s requirements.
Your lender will have required coverage limits for your insurance policy — many lenders require you to insure your home for at least 80% of its replacement cost. If you live in an area prone to flooding, it may also require that you have a flood insurance policy, and will put one in place if you don’t.
Contact your lender directly to find out what it requires. Compare that to your insurance policy’s declarations page to make sure you’re compliant.
How force-placed insurance works
If your insurance lapses or you don’t have sufficient coverage, your lender will put a policy in place for you. The policy your lender puts in place will protect its asset (your home), but it may not protect things like personal belongings, detached structures, and liability.
The premium for this policy may be added to your loan balance and monthly payment, or billed to you directly, depending on your situation. With a force-placed policy, if you don’t pay the premiums, your lender may start foreclosure proceedings.
What does force-placed insurance cover?
Force-placed homeowners insurance policies provide coverage to meet the lender’s minimum requirements. You can expect this policy to have robust dwelling coverage, but it most likely won’t cover anything else. In this situation, the lender only cares about protecting its investment in case of disaster.
What doesn’t force-placed insurance cover?
Force-placed insurance policies rarely cover other structures, personal property, or liability.
- Other structures coverage protects things on your property besides your home, like detached garages, fences, sheds, or barns. A force-placed policy may include coverage for these, but it might not. You should strongly consider getting a policy that includes this coverage if you can’t afford to replace your other structures out of pocket.
- Personal property coverage protects all your stuff. A force-placed policy won’t cover anything you own, meaning you’d be left with the bill if a fire destroys your belongings. Your lender only cares about protecting its investment, not your furniture, clothes, and other property.
- Liability coverage protects you from legal costs related to a lawsuit. This may not sound necessary, but it can be very important. For example, if someone slips and falls in your driveway because you forgot to put out ice melt, they could sue you. Liability coverage protects you and your assets in this situation.
How much does force-placed insurance cost?
Forced-placed insurance can cost four to 10 times more than a regular homeowners insurance policy. The average U.S. homeowner pays $106.50 per month, or $1,278 per year, in homeowners insurance premiums, according to the National Association of Insurance Commissioners. That means the average person could expect to pay $426 to $1,065 per month, or $5,112 to $12,780 per year, for a force-placed insurance policy.
Most force-placed insurance policies are put in place regardless of the condition or location of the property. They also don’t usually consider factors like previous insurance claims on the property and will issue a policy regardless of local risk of disasters like wildfires or hurricanes. This is part of what makes these policies so expensive.
When you choose a homeowners insurance policy for yourself, you’ll have more options and can find a more competitive rate. Lenders may work with only one insurance carrier, and they have no incentive to negotiate discounts on your behalf.
Keep Reading: How Much Does Homeowners Insurance Cost?
What to do if your lender puts force-placed insurance on your home
Lenders are required by law to notify you at least 45 days prior to putting a force-placed insurance policy in place. At that time, you’ll have the ability to get your own insurance policy and send proof of the policy to your lender, preventing the force-placed policy from starting.
If you don’t get another policy in time and the force-placed policy begins, don’t panic. Make sure that you keep paying your mortgage, including any price increase to cover the force-placed insurance policy.
How to avoid force-placed insurance
The best way to avoid a force-placed insurance policy is to make sure that you have sufficient coverage for your home and you don’t let that coverage lapse.
The United States Government Accountability Office found that forced-placed insurance policies are most often used when borrower-purchased insurance coverage lapses, usually as a result of nonpayment or when the insurer cancels or decides not to renew the policy.
Paying your homeowners insurance through an escrow account or through autopay can make it harder to miss payments and have your policy canceled. But sometimes insurers cancel policies if you’ve had several insurance claims, you live in an area that’s experienced a large number of disasters, or the insurance carrier is ceasing coverage in your area.
Ensuring sufficient coverage
Ensure that your coverage meets your lender’s requirements to avoid force-placed insurance. You can easily do this by contacting your lender directly to find out what it requires. Work with an insurance agent or review your policy declarations page to make sure your coverage is sufficient.
If it isn’t, it’s a good idea to take the opportunity to comparison shop for insurance policies from multiple carriers to make sure you’re getting the best coverage for the lowest rate. It may be time to change your insurance carrier if you’re unhappy with your coverage or your premium.