Beware of “Force-Placed” Insurance Scams on New Mortgages

You just refinanced or bought a new house and then you got an intimidating letter from the lender. It says something like this…
 
…Our records show that your hazard insurance has expired, and we do not have evidence that you have obtained new coverage. Because of this, we will purchase insurance on your behalf. You are responsible for the cost. It’s going to be really expensive and will not cover as much as your prior policy…
 
This is exactly what happened to me when I refinanced my mortgage.  However, my policy was NOT expired – it was intact and paid in full. So, what’s going on here?
 
What is hazard insurance?
Hazard insurance, a component of a homeowners policy, is required when you take out a new mortgage or refinance an existing one. The lender needs to protect their investment in case the home is damaged.
 
What is force-placed insurance?
If you do not provide the lender with proof of hazard insurance, they can purchase a policy for you and require you to pay for it. This is called “force-placing” insurance.
 
Is it legal?
It is legal because the lender has a right to protect their investment.
 
So, what’s the problem?
Unfortunately, some lenders take advantage of this system to benefit themselves.
- They may not provide sufficient notice before force-placing your insurance.
- They may place the policy with one of their own subsidiaries
- They may charge you more than the actual cost of the policy
- They may take commissions or incentives from an insurance company to place policies
- These policies often don’t include any liability or personal items coverage
 
How do I prevent this?
Whenever you get a new mortgage or refinance an existing one, make sure to get the lender proof of your coverage as soon as possible. Your agent should be able to do this for you.
 
If you get a nastygram like the one described above, contact your agent right away and have them provide proof of your coverage.
 
In my case, I called the lender and provided them with proof of my existing coverage. I also let them know that I consider this an unacceptable and misleading business practice, since my policy was, in fact, active and paid, NOT expired as they claimed in their letter.