Forced Place Insurance Forces Homeowners Closer to Foreclosure

Forced place insurance is an insurance policy taken out by a lender or creditor when a borrower does not carry insurance on an asset. For example, if homeowners with a mortgage do not carry property insurance, the bank servicing the mortgage will buy a policy on the homeowner’s behalf and send the bill to the homeowner. This is done to protect the bank that owns the loan.

Ironically, the reason why many homeowners do not get insurance in the first place is because they cannot afford to do so. Under the current system, companies providing forced place insurance pay commissions to banks for using their products. Many of the largest financial institutions, including Bank of America and JP Morgan Chase, also own forced-place insurance subsidiaries – generating them even larger profits. See HuffingtonPost. Clearly, banks have a financial incentive to choose the most expensive policy or to require excessive or duplicative levels of coverage: the higher the coverage, the bigger the commission. The American Banker found that the cost of bank-imposed policies could reach 10 times the normal market rates. Therefore, homeowners are not only forced to pay for unnecessary insurance that they cannot afford, but are also pushed closer to foreclosure by doing so.

In New York, hearings were recently conducted to investigate why the cost of this type of insurance has more than tripled since 2004, with premiums rising from $1.5 billion in 2004 to $5.5 billion in 2010. The status of two insurers, Assurant and QBE Insurance, who together control about 90 percent of the market for forced-place insurance, is also being scrutinized. See New York Times.

The Department of Financial Services is considering a ban on certain financial incentives between banks and insurers, and requiring a minimum loss ratio like it does with health insurance. See Businessweek. By doing this, these forced place insurance companies would be foreclosed from unnecessarily inflating the cost of their insurance, which may provide some relief for struggling homeowners.