The Danger of Force Placed Home Insurance Coverage...
A white paper by the Ace Underwriting Group
Florida's Insurance Source®
Many folks have their Home or other property insured by a policy provided by their lender. While some lenders provide Homeowner or other multi-peril coverage, their concern is not for the well being of their customers, but the security and protection of the collateral upon which the loan is made. In this case, the property is insured but the coverage is in favor of and solely to benefit the lender. For example: You purchase a home for $250,000 with a down payment of $50,000 (20%) and mortgage for $200,000 which you pay off over 30 years. In the language of that mortgage, you are required to maintain insurance coverage and name the lender as Loss Payee and Mortgagee to protect the lender against the loss of your home, which is the basis for your mortgage loan. You must pay for the initial Home Insurance policy at closing of the loan, so the first year's policy is paid up front. Your lender then sets up an escrow account, and bills you 1/12th of the cost of that policy in your monthly mortgage payments, so they can pay the renewal premium of your Home Insurance a year later. This amount, that you pay monthly, will vary each year based on the actual cost of the Home Insurance policy at the time of policy renewal and is normally updated in an annual escrow account review to include this cost, and that of your property taxes.
At some point along the way, the insurance carrier may decide to inspect your home, and may find your roof or other portion of your home is in disrepair. They send you a notice to make the required repairs, or they will cancel the policy. Your insurance carrier can also send a non-renewal and exit the Home Insurance market at the annual renewal. There are dozens of reasons that a policy can lapse over the 30 years your mortgage payment must be made, and therefore by the agreement you made in your mortgage, you are required to maintain uninterrupted insurance coverage.
Once a lapse occurs and your policy ends, you are responsible for obtaining another insurance policy to protect the property. Sometimes, many folks are not ready for the cost of the new policy, or to make the required repairs to make the property acceptable to the insurance carriers for new coverage. Eventually, your failure to insure the property as agreed in your mortgage Forces the lender to step in and Place coverage on your property to protect itself, and often for a miraculously low premium. The lender purchases this "Force Placed" policy to protect their interest and this relieves you from the responsibility of purchasing the insurance required by the mortgage. This may come at a great relief to the property owner, since the cost of such a policy is usually well below that of a standard Home Insurance policy and may actually work to lower their monthly escrow cost in their mortgage payment. But, this is a false sense of security because in the end, this Force Placed coverage doesn't protect the property owner, except to repay the mortgage if the property is damaged.
Force placed coverage is usually written on a decreasing policy form and provides protection in the amount currently owed on the mortgage, at the time of a loss. So, using our example above, while in year one of your Mortgage this policy provides nearly $200,000 in protection, but in year 29 that coverage may be just a few hundred dollars. As stated, the Decreasing Form lowers the amount of coverage each month to match the outstanding loan balance. Also, the protection usually pays directly to the lender, which relieves the property owner from having to repay the balance of the mortgage loan at that time, but does nothing to repair or replace the property damaged. Lastly, in the case of a home, there is usually no coverage for the owner's contents, nor the personal liability of the property owner. In this case, a fire that occurs under a Force Placed policy in year 29 of this mortgage example will pay off the few hundred dollars left on the mortgage, and nothing more. Leaving the homeowner with a burned out home, all possessions lost and no way to rebuild, no place to stay, and no way to even remove the debris left, except out of his own pocket.
Home Insurance should NEVER be allowed to be Force Placed by the lender and proper Home Insurance should always be secured through an insurance professional well versed in all the nuances of a Home Insurance policy. Whether you own a single family home, a condominium, a townhome, mobile home or villa, the correct policy form makes a BIG difference and using the wrong policy form to save a few dollars can be a disaster that lurks to hurt you at the point where you need the most help, after a property loss.
The professionals here at the Ace Underwriting Group are Florida's Insurance Source® because we sell all the types of Florida Home Insurance that protect you properly, and while the correct policy type and limits are usually more expensive than Force Placed coverage provided by the lender, the policy aims to protect YOU and your lender with coverage that makes you whole again after a loss, and not in financial ruin. Don't make the mistake and let Force Placed coverage give you a false sense of security that you'll be taken care of in the event of a loss. Instead, let one of our insurance professionals review your coverage and identify where your coverage may be inadequate, and show you the dangers that might be lurking, especially if your policy coverage was provided by your lender, before you suffer a loss that gives you a swift lesson in Force Placed coverage that you don't want to learn the hard way. The Home Coverage review is free and takes just a few minutes. Give us a call today and find out that proper Home Insurance coverage can give you the peace of mind that only knowing you're properly covered for any type of loss can provide. Be sure to read our whitepaper on Cut Rate coverage as well. Keeping you protected properly at a rate you can afford is our goal.
Call us today for your valuable, FREE Home Insurance review.