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Generally, mortgages require borrowers to purchase adequate insurance to protect the property that is being financed. Failure to do so may happen in a number of ways – cancellation, withdrawal, a simple oversight, lapse, lack of proof of insurance, or too little coverage.

If a lender deems a property to not have a sufficient level of insurance coverage (or the policy lapses), its mortgage service can seek out an insurance policy on the property to protect the lender’s financial interests. The servicer then places the insurance on the property and charges the property owner for the costs.

This scenario is called “ force-placed insurance ” (FPI), also known as “lender-placed insurance” or “creditor-placed home insurance.” This can occur when a mortgage contains a provision that that allows the lender to purchase FPI to protect itself in the case of any damage to the property.

Obligations

The homeowner has the responsibility of providing proof of insurance satisfactory to the lender. Similarly, the law sets forth the manner in which a lender is to notify a homeowner prior to placing such insurance on the property. Some of the notices required to a homeowner include the following:

  • That there is an obligation to maintain hazard insurance on the property;
  • The procedure by which the borrower can provide proof of insurance; and
  • If the borrower fails to provide such proof, the consequences, including that of force placed insurance.

Of course the most practical approach for both insureds and lenders is that the insured maintain property coverage. Failure to do so has the results indicated above.

About The Author

Bill Hager is an insurance and reinsurance expert and arbitrator. He is President of Insurance Metrics Corp. and also an elected member of the Florida House of Representatives, where he serves on the Insurance and other committees.

Mr. Hager is a former Insurance Commissioner for the State of Iowa, and former President of NCCI, Inc., the nation’s largest workers’ compensation rate corporation.

As a regulator for eight years in five positions ((i) Assistant Attorney General assigned to the Department of Insurance, (ii) First Deputy Commissioner of Insurance, (iii) Iowa Commissioner of Insurance, (iv) Administrative Law Judge, and (v) Executive and Member of the National Association of Insurance Commissioners), Mr. Hager, along with his staff, approved (or disapproved) of the language of most all insurance policies used by each of the 1,500 insurance companies doing business in the state.

This regulatory action also included the approval of policy application forms.

Disclaimer

In all of the general statements here, see the state law of the controlling jurisdiction. Every case is different and circumstances vary widely depending on the governing state law, policy provisions, and related considerations.

This blog is provided for educational purposes only. It is not intended to provide legal advice or an opinion in regard to any topic discussed. The blog should not be used as a substitute for legal advice from a licensed attorney in your state.