I got a call a few weeks ago from one of my clients in the Dallas area. I wrote the home insurance for he and his wife’s home two years ago and they wanted me to quote their car insurance too. To help me quote their insurance, his wife sent me a copy of a letter they received from their loan company. The letter simply stated that they needed to provide proof of current insurance or they would provide it for them at the price quoted in the letter. Sounds nice doesn’t it?! The truth is, the “help” they were offering had several “gotchas” in it and it was far from a fair price for the help they were providing.
Force placed insurance, also known as lender placed insurance, is an insurance policy provided by the lien holder on the property they’ve loaned someone money for. It provides coverage on the property when a borrower lets a policy lapse. There are many types of force placed policies including:
- Home and condo insurance
- Flood and wind insurance
- RV and boat insurance
- Car and motorcycle insurance
The companies that provide force placed insurance describe it as a policy designed to protect both the lender and the borrower from loss. That’s partly but not completely true. What it really does is protect the loan.
In the case of home, condo, flood and wind versions of force placed insurance:
- These policies protect the home up to the value of the loan.
- If there’s a total loss, the loan is paid off but the borrower is left holding the bag for everything else.
- There’s no coverage for contents or personal property.
- There’s no liability or medical coverage.
- There’s no coverage for loss of use or separate structures (fences, pools, etc.).
In the case of lender placed coverage for vehicles:
- These policies also protect the loan.
- They may or may not extend liability coverage to the car you hit if you’re at fault in the accident.
- There is no medical or personal injury protection coverage if someone’s injured.
- There’s no rental car reimbursement or roadside assistance coverage.
The whole purpose of lender placed insurance is to recoup the money they’ve loaned the borrower for the property that was lost. The borrower could still be liable:
- Medical charges
- Demolition of a home
- Debris removal
- Repairs to another person’s vehicle
For delivering so little on these policies, most people assume they cost less than the home or car insurance they could have obtained from Travelers, Safeco, Kemper, MetLife, etc. They’d be dead wrong.
- Forced place policies typically cost at least twice as much.
- In some instances, they may cost as much as 10 times more.
I’ve replaced a number of force placed insurance policies with real home and car insurance. In all but one instance, the savings was huge. I did have one client that actually paid about $100 more a year, but they realized that was a bargain since the policy they had didn’t cover anything but the loan.
The use of force placed insurance has exploded since the financial crisis started in 2008. Many people have suffered financially over the past 4 to 5 years and mistakenly thought they could save a little money by letting their policy lapse. Unfortunately, their financial condition may have worsened with their lender provided insurance. How do you avoid force placed insurance?
- The easiest action to take is to keep paying your home and car insurance.
- If the cost of that is more than your budget can accommodate, shop for new insurance or consider raising your deductible or changing your coverage.
If you just realized you have a lender provided insurance policy on your car or home, get this changed. Now! Changing to a real insurance policy should give your budget a shot in the arm and protect you. People with force placed coverage can replace that with their own coverage at any time.
As for my Dallas area client, I was able to provide a great car insurance policy that protects them at a nice savings over what their lender proposed. Have a question, comment or suggestion? Share them with us in the comments section of our blog or on our Facebook and Google + pages. I’d love to hear from you!