The Story on Homeowners Insurance and Forced Placed Coverage

September 21, 2015

When you buy a home and take out a mortgage, part of the agreement is that you will purchase adequate homeowners insurance coverage. Adequate coverage usually means that you are insured for the replacement of your home to 100% of replacement value or that your home has enough coverage to address the amount of the loan. The latter just means that the mortgage company wants enough coverage to pay the outstanding loan balance but most homeowners policies do not cover the loan amount, just the rebuilding of a home. In a nutshell, the mortgage company wants to make sure that they are protected if your home suffers an insurable loss such as fire or water damage. If you are in a flood zone, they will require you to get separate flood insurance, as regular homeowners policies exclude damage caused by flood and ground water.

Your mortgage company will, at a number of times, prompt you to provide proof of home insurance.

This typically happens when:

Your first purchase your home; this will be done through the title company.

At the annual renewal; however most homeowners policies automatically send the lender a copy of the renewal.

When you refinance and there is a new lender, this is done by the title company.

When a policy is cancelled, either at the renewal or for non-payment.

When you get a request, you should always immediately forward the request, along with any instructions, to your insurance agent. If a title company is involved, you should always provide your agency information (usually Name, Fax Number/Email Address). If you are purchasing a new home, you should always contact your broker at least 3 weeks prior to make arrangements for a policy and notify your title company as soon as you can. The quicker your agent receives the information, the fewer problems you will have when complying with your homeowners insurance requirements.

Should there be any lapse in your homeowners insurance, the mortgage company can and will force place coverage on your home and have the right to do this since it is in the mortgage agreement. This forced placed coverage is almost ALWAYS very expensive and more likely than not will only protect the mortgagee’s interests, not your interests. Coverages are probably very basic, will not protect you to the degree a regular homeowners policy would protect you and probably does not include liability insurance. The reason why these policy premiums are very expensive is the policy is not underwritten, and because of this there may be an assumption that you cannot get coverage on your own and that your property may be high risk.

To avoid this expensive forced placed coverage, attend to your lenders homeowners insurance requirement right away. Make sure you are paying attention each year as your policy comes up for renewal. Even if you have a three-day gap in your homeowners insurance, Mortgage companies can still come back and charge you for those three days, and it's not cheap. Your agent is here to help you avoid things like this from happening. Maintaining good communication, either via email or phone, is the key for things to go as smoothly as possible.