MIAMI – Has your home insurance company notified you that your policy is being canceled or won’t be renewed? If so, you should quickly secure a new policy if you are still making mortgage payments on your home.
Don’t procrastinate. Don’t blow off the notice. Buy a policy from state-run Citizens Property Insurance Corp. if you have no other choice.
You won’t like the alternative.
It’s called force-placed insurance, and your mortgage contract gives your lender the right to protect its interest by putting one on your property if you let your policy lapse.
It’s expensive – as much as two to 10 times as costly as normal insurance. You will be required to pay the inflated premiums, increasing your monthly mortgage payment.
You might lose the right to sue over claims disputes.
And it won’t cover your personal property or medical care for others who get injured on your property.
Consumer advocates fear that Florida’s insurance crisis and the expiration of federal moratoriums on foreclosures will lead to an increase in force-placed insurance, which is also known as creditor-placed or lender-placed insurance.
“I expect an explosion in force-placed policies as [pandemic-related] protections subside,” said Birny Birnbaum, a former Texas insurance regulator and current director of the Texas-based Center for Economic Justice, an advocacy and education organization representing low-income and minority consumers on issues involving insurance, utilities and credit.
Andrew Pizor, attorney with the National Consumer Law Center, said he expects force-placed policies to increase as Florida’s insurance crisis worsens.
Ryan Papy, president of Palmetto Bay-based Keyes Insurance, said that while his agency hasn’t yet noticed issues with force-placed policies among potential clients, increases in policy cancellations over the past few months could spur “a higher frequency in the future.”
Florida has highest share of force-placed insurance
Florida already leads the nation in spending on force-placed insurance, according to data reported to the National Association of Insurance Commissioners.
Florida borrowers were charged $795 million of a total $3.3 billion in premiums nationwide for force-placed coverage against flood, wind and all other perils, the data shows. The state’s 24.1% share of the force-placed insurance market is down from 35% in 2009-11, the worst years of the housing bust that triggered the Great Recession.
That era was marked by abuses by home loan servicers and insurers that triggered class action lawsuits, multimillion-dollar settlements and federal protections for borrowers of loans backed by Fannie Mae and Freddie Mac.
Servicers and insurers were accused of working together to reap windfall profits on policies placed on troubled properties. Regulators found that insurers were paying lucrative commissions or other incentives to loan servicers that purchase force-placed policies. Loan servicers were accused of force-placing insurance on properties without giving borrowers adequate warning. Insurers were accused of issuing policies on properties serviced by affiliated companies, and providing reinsurance for properties insured by companies owned by loan servicers.
And insurers were discovered providing kickbacks to loan servicers in the form of free or below-cost administrative services, including monitoring borrower databases to identify which ones stopped carrying their own insurance and were thus eligible for forced-placed coverage – a service called insurance tracking.
“In some cases, mortgage servicers were getting close to 50% of premiums kicked back in the form of commissions, reinsurance and free or below-cost services,” Birnbaum said.
In 2014, Wells Fargo and two lender-placed insurers, Assurant Inc. and QBE, agreed to repay affected customers up to 11% of their premiums to settle a class action lawsuit filed in Miami. Bank of America settled a similar case that year for $228 million, while settlements were reached in cases against J.P. Morgan Chase & Co. and Citigroup Inc.
In arguing for increased protections, Birnbaum cites data showing that the top seven force-based insurers in Florida reported a combined loss ratio of 34.2% in 2020. That means that for every $100 in premium paid by borrowers, the insurers had to spend only $34.20 on claims, leaving them awash in cash.
Traditional insurers in Florida have been reporting far higher loss ratios – 68.5% in 2019, according to ratings agency A.M. Best.
Loopholes still hurt consumers
State and federal-level reforms, including in Florida, barred insurers from paying commissions to loan servicers but did not prohibit them from providing insurance tracking and other free and below-cost services, Birnbaum said. In fact, because the cost of the tracking is recouped from premiums paid by borrowers, consumers with force-placed coverage are essentially paying for tracking of all insurance customers, he said.
Florida also allows loan servicers to force-place coverage that names only the lender as the policy beneficiary. That left Ethel Reconco unable to sue Integon National Insurance Co., which was force-placed by her lender, for a claim related to Hurricane Irma in 2017. In January, the 4th District Court of Appeal ruled that the Fort Pierce woman had no standing to sue because she was not a named insured on the policy.
Currently, fewer than 10% of Florida policies don’t name the borrower as a named insured along with the lender, but Birnbaum says even that percentage is unacceptable.
Federal reforms have offered consumers some protections, including requiring loan servicers to continue making payments for traditional insurance if the borrower has an escrow account and cannot afford to make the insurance payments. That requirement, however, does not cover borrowers whose policies are canceled or not renewed.
Loan servicers are also barred from force-placing insurance without a reasonable basis to believe that the borrower failed to maintain insurance coverage as required in the loan documents.
Servicers must send two notices before purchasing a force-based policy. The first must be sent at least 45 days before purchasing the force-placed policy. The second must be sent no earlier than 30 days after the first notice and at least 15 days before charging the borrower for the force-placed insurance. This notice must include the cost or a reasonable estimate.
If a borrower with force-placed coverage provides proof that a traditional policy has been purchased for the property, the servicer is required to cancel the force-placed insurance within 15 days of receiving the evidence and refund any premiums charged while both policies were in place.
Loan servicers don’t always comply with that requirement, according to a lawsuit filed May 7 by Kimn S. Sullivan, a Palm Beach Gardens homeowner who has been trying to persuade Bank of America to remove a flood insurance policy placed on her home since 2009. In her suit, Sullivan, who lives in an area at high risk for flooding, says her mortgage loan contract exempts her from having to buy an individual flood insurance policy if her house is covered by a master policy purchased by her homeowner association.
But Bank of America won’t recognize the contract provision and has added more than $21,000 to the balance of her loan to recoup the force-placed policy cost, her suit states. A Bank of America spokesman said the company had no comment on the lawsuit at this time.
Low-income borrowers are most vulnerable
Most Florida home loan borrowers facing cancellation or nonrenewal understand the risk of failing to maintain insurance coverage, Papy says.
“Typically, the cancellation letters are drafted in an alarming way to push the insured to find other coverages,” he said by email. “In most cases the cancellations provide significant notice and the insureds are aware that not having coverage will lead them down the path to force-placed coverage.”
Paul Handerhan, president of the consumer-focused Federal Association for Insurance Reform, said he expects rising costs of traditional insurance will trap vulnerable homeowners, such as low-income borrowers, people who speak English as a second language or those who don’t understand the difference between traditional and force-placed coverage.
If their escrow account doesn’t have enough money to cover a sudden insurance rate increase, their lender will ask them to come up with a lump sum to cover the shortfall. If they can’t afford the lump sum, their policy won’t be renewed and their loan servicer could then force-place a more expensive policy. That could make their new mortgage payment unaffordable, triggering foreclosure and possible loss of their home, he said.
Others will struggle to make their payments not knowing they are paying more than they should for insurance that doesn’t cover as much and doesn’t name them as a beneficiary of the policy. “And they won’t know that until it comes time to file a claim,” he said.
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