Lender-placed insurance, also known as creditor-placed insurance or force-placed insurance; is an insurance policy placed by a bank or mortgage servicer on a home when the homeowners’ own property insurance may have lapsed or where the bank deems the homeowners’ insurance insufficient. All mortgages require borrowers to maintain adequate insurance on their property. The requirement in mortgages generally specifies maintenance of “hazard insurance.” While hazard insurance is a term used in banking circles, insurers generally refer to homeowners insurance of property insurance. Borrowers can fail to maintain the required coverage for a variety of reasons—cancellation, a withdrawal by their existing insurer, or even just a simple oversight. However, if a property insurance policy lapses or is canceled and the borrower does not secure a replacement policy, most mortgages allow the lender to purchase insurance for the home and “force-place” it. These standard provisions allow the lender to protect its financial interest in the property (its collateral) if a calamity occurs.
Recent discussion has focused on the rates charged for lender-placed insurance policies and whether insurers and lenders are making excess profits on this line of business. Typically, the lender-placed insurance premiums are higher than the property insurance the borrower could have purchased on their own. In addition to being more expensive, the lender-placed insurance policy also has limited coverage. For example, these policies generally do not cover personal items or owner liability. If a borrower does not pay the lender-placed insurance policy premium, they could be at risk of foreclose.
A key regulatory concern with the growing use of lender-placed insurance is “reverse competition,” where the lender chooses the coverage provider and amounts, yet the consumer is obligated to pay the cost of coverage. Reverse competition is a market condition that tends to drive up prices to the consumers, as the lender is not motivated to select the lowest price for coverage since the cost is born by the borrower. Normally competitive forces tend to drive down costs for consumers. However, in this case, the lender is motivated to select coverage from an insurer looking out for the lender’s interest rather than the borrower.
Insurance regulators in Florida, California, New York and Texas, recently held public hearings to learn more about these products and practices. There is currently a New York State investigation looking into whether insurers are charging too much and if certain insurance companies are succeeding by what are essentially kickbacks to lenders. A public hearing on lender-placed insurance was held on May 17, 2012, at the New York State Department of Financial Services. After the hearing, New York State's Governor Andrew M. Cuomo and Superintendent of Financial Services Benjamin M. Lawsky announced that lender-placed insurers operating in New York must lower the premiums they charge. “Our hearings suggest a lack of competition, high prices and low loss ratios, all of which hurt homeowners,” Lawsky said in the release.
The NAIC has also begun reviewing lender-placed insurance as the practice has become more common in this weakened economy. On August 9, 2012, the NAIC Property and Casualty Insurance (C) Committee and the Market Regulation and Consumer Affairs (D) Committee held a public hearing to further discuss the use of lender-placed insurance and the effect of the practice on consumers. The hearing took place at the NAIC Summer National Meeting in Atlanta. Presentations, testimony and audio of the public hearing are available on this Webpage under ‘Additional Resources.’