What is Force Placed Insurance and Why Does it Happen?
You've just received a letter from your bank telling you they are buying an insurance policy on your behalf in order to cover your home. What should you do?
First, a little background. When a bank lends money on a home, they use the home as collateral for the loan. They also insist that this collateral have enough insurance coverage to cover the loan. When the bank receives notice that the insurance coverage on the home has cancelled, they send a letter asking for proof that the policy has been reinstated or proof of replacement coverage.
If the Homeowner cannot provide proof of this Home Insurance coverage, the Bank will buy an insurance policy for the homeowner- this policy is called Force-placed Insurance. At first glance, this might not seem like a bad thing. After all, the homeowner has coverage on the home, has satisfied their mortgagee, and did not have to go through the process of finding a homeowner insurance carrier writing in Florida. Better yet, in cases where the homeowner has an escrow account, the bank will pay the premium from the escrow account and bill the homeowner monthly. Sounds great, right? Wrong! These force placed insurance policies only cover the bank's interest in the property and even worse, they cost 2 to 5 times more than a conventional policy.
Example of Force Placed Insurance
John Doe owns a home valued at$400,000. The Replacement Cost (how much it would cost to rebuild the home) is $350,000 and his land is worth $50,000. He has a $250,000 mortgage with Bank X and has been non-renewed by his Homeowners Insurance Company because they are reducing their exposure in Florida (Sound familiar?). He receives a letter saying that Bank X will buy a policy for him and pay it from his escrow account and bill him monthly. Since his prior policy cost him $4,000, he decides to let the bank buy the policy for him. Bank X buys a policy with their Insurance carrier that specializes in Force placed Insurance. They charge $7500 for a $250,000 policy. (I'm being very kind with this pricing- it could be as high as $10,000). The increase in price is only the beginning of a potential disaster. Since the bank only collected enough money in escrow to pay a renewal based on $4000, he is immediately short $3500 in his escrow account, so they add $3500 to his next mortgage bill. Then since they collect the insurance premium for next year from his monthly mortgage payment, they need to adjust this to reflect the extra $3500 they'll need for next years Insurance. So add another $300 a month to his monthly mortgage payment. But it could get even worse. Since the policy is purchased to protect the bank's interest (Loan Amount), the policy only covers the $250,000 amount of the mortgage- not the actual cost to rebuild the home! It gets worse. The policy will have no coverage for John Doe's personal property, no coverage for other structures, loss of use, and no liability (lawsuit) coverage. If his home were to burn in a fire, John Doe's bank would be paid the $250,000 they are owed and John Doe would own the home - or should I say the burnt shell of a home with no coverage for the personal property- furniture, clothing, electronics etc- that burned inside the dwelling.
How do I get out of Being Force Placed?
The solution? Contact us and we'll find you a policy that covers Replacement Cost to rebuild your home, the contents in your home, and the liability you need against lawsuits arising out of your premises. Best of all, it will cost less, with less impact on your monthly mortgage payment, and we can bill your mortgagee! Most homeowners set up an escrow account with their mortgagee (bank)
If you're interested in getting a quote, click below: