Across Florida, homeowners have received letters from their mortgage lenders instructing them to buy flood insurance. Often times, the homeowners already have flood coverage, or if they do not, the insurance offered by their lenders is prohibitively expensive. People faced with these letters do have other options and they do not need to give in to banks' intimidating letters.
Force-Placed Insurance
Almost all mortgage contracts give lenders the right to require homeowners to carry insurance. After all, mortgage lenders have a legitimate interest in assuring their investments are protected.
If a homeowner does not have adequate insurance, the lender will send a notice offering insurance from a partner insurance company. If the homeowner does not respond within the lender's dictated time frame — which may be a short as 30 days — the lender may buy the insurance and demand to be reimbursed through a system called force-placed insurance.
A growing problem with mandatory coverage and force-placed insurance is that lenders attempt to require flood insurance from homeowners not in flood plains, or they buy force-placed insurance for homeowners that costs far more than the market price of insurance and receive hefty commissions from insurance companies.
This burdens homeowners with premiums that may be up to 10 times more expensive than regular insurance in a state already struggling with foreclosures. As an example of exorbitant insurance coverage, American Banker reported that one Florida homeowner was forced by Sun Trust Mortgage, Inc. and QBE Specialty Insurance to buy a $230,000 insurance policy when the house's appraised value was less than $82,000.
Also, plaintiffs in several lawsuits over mandatory insurance allege that lenders imposed unnecessary insurance on them and backdated it to provide retroactive coverage. In one case, the alleged retroactive-insurance costs amounted to more than the homeowner's monthly mortgage principal and interest payments.
If the allegations are true, lenders may have violated the law. As Brian Sullivan, spokesman for the U.S. Department of Housing and Urban Development, pointed out, the Real Estate Settlement Procedures Act prohibits fee-splitting and unearned fees for services that are not performed, such as backdated coverage.
Unregulated Companies
In addition, companies that carry force-placed insurance are not regulated in Florida because the insurance is characterized as "surplus line" insurance. The imposed coverage is not limited by state premium caps and is not guaranteed by state funds. This exposes consumers to significant risk in places where catastrophic events like hurricanes are not uncommon.
Florida law states that surplus line insurance should only be purchased when other insurance is not available from regulated insurance carriers. The law also requires insurance agents to document "multiple efforts" to find a regulated carrier before using surplus line insurance. But this is almost never done, according to American Banker.
These concerns caught the attention of a coalition of 50 state attorneys general as part of their inquiry into banks' mortgage and foreclosure practices. The attorneys general recommended restricting lenders' ability to use force-placed insurance. The attorneys general propose:
- Limiting the cost of force-placed insurance
- Banning commissions to banks for placing policies
- Prohibiting force-placed insurance when voluntary coverage could be extended
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Preventing lenders from using subsidiaries to provide the insurance
Avoid Force-Placed Insurance
Rather than wait for these recommendations to be implemented, homeowners can take the following steps to protect themselves against force-placed insurance:
- Ensure your home has active insurance as required by your lender
- Understand your responsibilities in the loan agreement, such as the types of insurance necessary and the deadlines for obtaining insurance
- Send written proof of insurance to your lender
- Contact your lender promptly if your policy lapses, is cancelled or is not renewed
Homeowners can also avoid mandatory insurance if they prove the coverage requested by the lender is not necessary. For example, homeowners whose lenders demand flood coverage may contest the requirement by demonstrating that they do not live in a flood plain. Paying a surveyor once to appraise the land's flood risk is well worth the savings of avoided flood insurance premiums.
If you have received a notice letter from your mortgage lender or had force-placed insurance imposed on you, contact an attorney with experience in insurance claims. A knowledgeable insurance lawyer can help you understand your legal rights and obligations.
