Force-placed insurance, or lender-placed insurance, exists to help protect a lender in case their borrower’s own insurance coverage lapses. When a lapse is detected, it triggers a 45-day notification period in which the lender attempts to communicate to the borrower that, according to the mortgage contract, the coverage gap must be rectified or the lender will arrange a force-placed insurance policy.
 
If you are a lender or have real estate investments, what’s the key phrase in that last sentence? If you answered “When a lapse is detected…” you are correct. Force-placed insurance is there to protect collateral, but it can’t be applied if there isn’t a system to flag that it’s needed.
 

Tracking Certificates of Insurance

In a recent audit, the inspector general for the US Department of Housing and Urban Development found that a projected 31,500 FHA-insured loans did not have the required flood insurance coverage. The report states:
 
“This condition occurred because FHA did not have adequate controls to detect loans that did not maintain the required flood insurance and its handbooks did not adequately guide servicers on the flood insurance requirements. As a result, the FHA insurance fund was potentially exposed to greater risk from at least $4.5 billion in loans that did not maintain adequate NFIP coverage.”
 
Force-placed insurance can’t be instituted if you cannot track whether the properties in a portfolio have up-to-date and valid insurance. How did this happen to an organization like HUD? The audit found:

• FHA statutes did not require servicers to enter flood insurance compliance information into HUD data systems, so,

• FHA didn’t know whether an NFIP policy was in place, nor the coverage amount

• FHA also didn’t have any flood zone updates that servicers might have received 

There was the issue of incomplete data coming from servicers to HUD, but there was also another data shortfall. For the flood insurance data they did have, there was no data connection to the NFIP to confirm whether policies were valid and coverage was sufficient.
 

Force-Placed Insurance For Different Lapse Types

Force-placed insurance can be instituted for many types of required insurance. Of course, it all depends on the mortgage contract language, but some examples of required insurance coverage include:

• 100% full replacement cost

• Earthquake, wind, and/or flood

• Builders risk

• Boiler & machinery or equipment breakdown

• Terrorism

• General liability

• Ordinance & law

There are also different degrees to which a borrower’s insurance coverage can lapse. Consider the following:
 

Lack of Evidence of Insurance

The forced-place insurance process may begin in this typical scenario when the borrower has not provided proof of insurance. They may indeed have it, but the documentation is not in your system. This can be due to multiple reasons, often timing related, like when a mortgage has been refinanced and paperwork is cascading through data systems. Human error can also play a part. Usually, a phone call or email rectifies the issue and a force-placed policy can be removed.
 

No Insurance Policy in Place

According to an Insurance Journal article, 70% of all renter’s policies cancel prior to renewal, mostly due to non-payment. It’s in circumstances like these, when you have received confirmation that a required insurance policy has in fact been cancelled, that a force-placed insurance policy is needed immediately.
 

Insurance is Inadequate or Incomplete

Perhaps an insurance policy is in place, but the mortgage contract specifies that it must provide a certain level of coverage or the carrier must be of a certain rating. The lender could decide that this lower level of coverage is more of a “technical default”, and not a significant risk to their investment. The lender may discuss this situation with the borrower and decide not to impose force-placed insurance.
 

Force-placed insurance administration

Tracking certificates of insurance and compliance doesn’t have to be a manual, Excel spreadsheet-driven process. There are plenty of automated services on the market at a variety of price points and feature levels that can assist with this arduous but important part of your business. Some of these programs offer more than just certificate tracking. The Credit Union Times recommends looking for a system that:

1. Reduces consumer aggravation and compliance concerns

2. Issues refunds to lenders and consumers more quickly and accurately

3. Improves accuracy and timeliness of loan-related communications with borrowers

4. Vastly reduces the number of lender-placed insurance policies on properly-insured loans

5. Provides real-time assessments of exposure in any given catastrophic situation

6. Offers valuable insights on the location and status of a delinquent loan’s collateral and borrower

7. Eliminates costly errors related to total loss valuations and settlements

8. Improves negotiations with insurance carriers

9. Protects institutions on claims where the collateral is repairable

10. Reduces the time taken to issue a Letter of Guarantee

When it comes to administering the force-placed insurance policies themselves, Insurmark has an online portal that makes it quick and easy for you to manage policies across your portfolio. Want a tour? Contact us to learn how we can make it easier for your team to maintain this important protection on your assets.    
 
_{This article is provided for general informational purposes only and is not intended to provide individualized advice.}