Lender Placed Insurance in the Public Eye
Lender-placed insurance (LPI), also known as force-placed insurance, has been a standard practice in mortgage agreements for many years. It protects a lender from damages, should a homeowner’s insurance policy lapse, subject to the policy terms and conditions. Typically, lender-placed coverage is for the outstanding balance of the loan. In many instances, this can be far below the replacement cost to rebuild the home, should there be a total loss. Although a necessary safeguard, the public perception of the practice is largely misunderstood.
According to the U.S. Government Accountability Office, “the 2007-2009 financial crisis resulted in an increased prevalence of LPI” prior to being less prevalent as foreclosures fell. This increase in lender-placed insurance practices caught the eye of several media outlets, including the New York Times, who began highlighting homeowner complaints with the practice.
Lender-Placed Insurance Complaints
The main complaints about lender-placed insurance appear to be centered around the short time homeowners have to reply to LPI notification letters and the high costs of the insurance itself.
Lender-Placed Insurance Notification Letters
All mortgage lenders require their borrowers to carry insurance that will cover, at least, the amount of the loan. If a lender has a reasonable basis to believe that a particular borrower’s insurance coverage has lapsed, then the notification process begins with a letter to the homeowner. Under federal law the servicer must send the notification letter
45 days before assessing a homeowner with a premium charge or fee. Per the law, a second letter must then be, “delivered to the borrower or placed in the mail at least 15 days before a servicer assesses on a borrower a premium charge or fee related to force-placed insurance”.
That time frame of 45 days is at the heart of many critiques of lender-placed insurance practices. In 2011, Paul Sullivan of the New York Times wrote of notification letters
, “The problem is that homeowners often don’t pay much attention to the initial bank notice. And if they don’t react quickly, they will soon see the new insurance bills“. The article points out that this can be financially devastating, especially if the homeowner does have the appropriate insurance, but didn’t provide proof.
If a lender does force place coverage and a borrower can provide proof of duplicate coverage, the lender-placed policy may be cancelled back to the date of double coverage. This way, the borrower is only paying for one policy and the lender has proof of continuous coverage. With Insurmark, premiums collected on a lender-placed policy for a property with in force coverage will be refunded.
Perhaps the strongest critique of LPI is the cost
. Forbes writes that, “[f]orce-placed insurance is typically more expensive than the home insurance you would buy when shopping on your own.” Indeed, lender-placed insurance can cost significantly more than a typical homeowners insurance policy, but why? A more complete understanding of LPI cost drivers may help to reduce the confusion of frustrated borrowers.
Lender-Placed Insurance – an Economist’s Perspective
A standard homeowner’s insurance policy goes through an individual underwriting process to determine that property’s specific risk. Factors may include:
Physical characteristics of the home (e.g. age, location, protection class)
Likelihood of hurricane, hail, wildfire, etc.
Cost to rebuild
In contrast, as Hartwig explains, “no consideration is given to any of these factors for any individual property as a precondition for acceptance under the bulk master LPI program.” Because the program is accepting properties as a portfolio, it must assume a higher risk, and therefore quote a higher price.
Concentration of Catastrophic Risk
Hartwig also points out that the states with the highest mortgage foreclosure rates are highly catastrophe prone, which “suggests that LPI insurers will have vulnerability to catastrophe losses that often exceeds that of standard market home insurers”. With greater likelihood of a loss due to flood, hurricane, or some other severe weather event, the rate for lender-placed insurance increases.
How to help borrowers?
Lender-placed insurance is a necessary protection, but it can also cause of lot of angst with borrowers. Of course, you can’t control whether borrowers are opening their mail or keeping their primary homeowner’s coverage up-to-date. But are there additional means of communication (email or an old-fashioned phone call) that you could utilize to ensure the message got through? Or, at the time of closing, maybe loan officers can emphasize LPI requirements and remind customers to make doubly sure that their homeowner’s policy remains secure.
It’s understandable that homeowners would be unhappy about the activation of a lender-placed insurance policy. With increased education and clear communication from lenders and servicers, homeowners can, at least, accept the reasons for the cost and quickly remedy the issue.
Do you need Lender-Placed Insurance coverage?
This information is provided for general informational purposes only and is not intended to provide individualized advice. All descriptions, summaries or highlights of coverage are for general informational purposes only and do not amend, alter or modify the actual terms or conditions of any insurance policy. Coverage is governed only by the terms and conditions of the relevant policy.