Force Placed Insurance — Mortgage Company Windfall?
Do you know what “force placed insurance” means?
With any luck you will never have to know what it means, but typically it translates to:
- No control
- Inflated premiums
- Very limited coverage
- Increased mortgage payments
Force placed insurance on your home can happen under a number of different circumstances.
For example, your homeowner’s insurance company tells you they will only insure your home for the value of the structures and will not include the land; let’s say $200,000. The mortgage company tells you they want coverage in the amount of the mortgage at minimum; let’s say $300,000.
Force placement can happen with your mortgage company purchasing a policy for you that provides $100,000 coverage in excess of the $200,000 policy you obtain and your mortgage company then pays for both policies through your mortgage payment; usually increasing it substantially. It can also happen by your mortgage company telling you they will obtain a policy in the amount of $300,000 and pay for it through your mortgage; again usually increasing your mortgage payment significantly.
These two scenarios may not sound all that terribly unreasonable, right? They do not until the homeowner sees the amount of the premium being charged by the force placed insurance company. Premiums for the force placed coverage can be 5 to 10 times more costly than homeowners insurance you and I might buy from an insurance company.
Let’s take the following example:
- $2000 per month mortgage payment
- $6ooo per year premium ($500 per month)
- $2500 per month mortgage & insurance payment
- Forced placement increases insurance premium to $18,000 per year ($1500 per month)
- $3500 per month new mortgage & insurance premium
A more than 30% per month increase in mortgage payments would send many homeowners directly into foreclosure.
Also, almost always, the only “person” covered is the mortgage company with no insurance protection given to the homeowner at all.
How can they do this? There are many factors driving this trend; some legitimate, some semi-legitimate and some possibly fraudulent.
Mortgage companies must be permitted to protect their mortgage amounts. In today’s insurance environment, a homeowner may have their insurance cancelled (through no fault of their own) and may not be able to find replacement coverage. It is unfair to the mortgage holder to be without insurance to protect their mortgage amount in the event of fire or other catastrophe.
Mortgage companies often must place insurance rapidly and in geographic areas not favored by the standard insurance industry company. In Florida, for example, between legislators and insurance companies, they have mucked up the insurance environment so badly that coverage can be difficult to obtain. So, when mortgage companies have had to place quick coverage, they have often gone to “surplus lines companies”.
Surplus lines companies, at least in Florida, have virtually no regulation; their premiums are unregulated, their premium increases are unregulated, their financial solvency is marginally monitored and there is no protection provided in the event of a surplus lines insurance company bankruptcy.
Recently, Florida legislators have been toying with the idea of kicking homeowners out of the state sponsored company, Citizens, and sending a number of them to surplus lines companies. This, of course, is a colossally stupid idea, but that fact is likely not going to sway Florida lawmakers.
The American Banker reports that Wells Fargo has gotten itself in a potential jam as a result of force placing insurance with OBE Insurance Company and then receiving as much as a 40% commission for placing the coverage.
It is estimated that, in Florida, we are talking about over $50 million in premiums and at 40%, Wells Fargo is making $20,000,000 on force placing coverage. More commonly commissions are in the area of 15% to 20%, but that still would represent a windfall of as much as $7.5 million to lenders engaging in this practice.
So, the case filed in the US District Court in the Southern District of Florida provides significant potential financial loss for Wells Fargo. Judge Robert Scola, Jr. is the judge overseeing the litigation (Williams v Wells Fargo) and he issued a warning to Wells Fargo concerning their treatment of homeowners going forward:
“Wells Fargo has unabashedly set out its threats to retaliate against any homeowner seeking to avoid alleged excessive and inflated force-placed insurance premiums,” Scola wrote. The judge added that he intends to prevent the bank from “establishing post-litigation, vindictive business practices.”
It is likely that Wells Fargo is not alone in these practices. The New York Times reports that the NY Department of financial Services has sent out subpoenas seeking information from lenders about their respective involvement. Subpoenas have been sent to lenders including:
- JP Morgan Chase
- Bank of America
- Morgan Stanley Mortgage Capital Holdings
Should the words “force place insurance” come out of your mortgage company representative’s mouth, ask questions. Try to obtain coverage on your own or through your insurance agent.
Ask the mortgage holder:
- Who are they placing the coverage through?
- Is it a surplus lines company?
- Will you be provided with coverage in addition to the mortgage holder?
- Will the mortgage holder or any of its subsidiaries be receiving commissions from the force placed coverage?
- How much will the premium be?
- Are there alternatives?
Demand complete answers to your questions. If necessary, contact an attorney who practices in lender or foreclosure law. Contact the Department of Financial Services in Florida or the Attorney General consumer affairs office.