What is Lender Placed Insurance?

When a mortgage company or bank feel that homeowners insurance is insufficient or might have lapsed, they will put lender placed insurance on the property. This type of insurance is also known as forced placed or creditor placed insurance, and is utilized in the event that the appropriate homeowners insurance does not reach the requirements of the mortgage lender. If the lender feels that their investment is not properly insured, they will in fact purchase additional insurance on behalf of the buyer and then pass on that additional cost to the consumer at a price that is typically much higher than can be found in the private market with a much lower level of protection. Whether the insufficient insurance is a result of oversight, insurer withdrawal, or policy cancellation, the lender will take these steps to correct the problem to protect their interest.

Hazard Insurance?

Depending where the property is that is being insured, many mortgages have a stipulation within the agreement that require the appropriate hazard insurance be in place to protect the investment. If the lender finds the borrower does not have this insurance in place, they will take the appropriate measures to purchase lender placed insurance, regardless the cost and pass it on to the borrower. This coverage will often be placed retroactively to the date of the last expiration of the prior insurance and will be added to the mortgage note, compounding the retroactive cost on top of the monthly mortgage note and often due all at once. Now the lender can require that the homeowner makes the additional insurance premiums or they are in default of the loan agreement. This type of insurance does not cover personal items inside the home, the policy is in place to simply protect the lender of their financial interest in the dwelling. In some cases the in the event of a total loss the lender will have the choice to simply pay off the loan and not rebuild the house, a potential catastrophic loss to the homeowner. Once the insurance policy is in place, if the borrower fails to keep up on the premiums, the property is at risk of falling into foreclosure.

Adequate Insurance?

Most mortgage loan agreements allow the lender to have the adequate insurance on the property for as far back as they can prove it had the appropriate coverage. What this translates to the consumer is your lending institution can buy back insurance to cover all the months or years they feel the property was under-insured, then they simply pass on this enormous bill to the borrower. Not only is the consumer susceptible to a huge insurance bill for coverage going back to the last date of full coverage, they are paying a much higher rate with a more expensive insurance provider. The lender will go to great lengths to ensure their investment is in fact covered, regardless the final cost to the consumer and the increased risk of foreclosure.

When a person applies for a mortgage loan, they agree up front that they will provide adequate insurance coverage on that said property. When lender placed insurance is purchased, you may first become aware of it when you see your mortgage payments go up. It is very important that you carefully analyze your mortgage bill each month to make certain that the lender has not gone ahead and purchased forced insurance on your behalf. Reviewing the information on all mortgage statements and declaration pages are your best defense for identifying this issue quickly.