What Is Force-Placed Insurance? Consequences of Dropping Lender-Required Coverage

Force-placed insurance is a type of homeowners insurance or auto insurance policy that your lender can obtain to cover your property while you are still paying off your home or auto loan. In many cases, force-placed policies are more expensive and provide less coverage than standard policies.

Keep reading to learn more about force-placed homeowners insurance and force-placed car insurance including when you may have to pay for them and what you have to do to cancel them.

Key Takeaways Force-placed insurance is a home, flood or car insurance policy your lender purchases to cover your property if you don’t maintain insurance coverage in accordance with the terms of your loan. While your lender may pay the force-placed insurance premiums up front, you will likely bear the cost in the form of higher mortgage payments. A force-placed home insurance policy may only include dwelling coverage, while force-placed car insurance policies may only include the minimum coverage required in your state plus comprehensive and collision coverage. You may have to pay twice as much for force-placed insurance as you would for a standard insurance policy. If you purchase your own insurance policy that meets your lender’s requirements, they are required to cancel their force-placed policy and give you a refund if there was any overlap between your new policy and the force-placed coverage.

How Does Force-Placed Insurance Work?

Also known as creditor-placed insurance, lender-placed insurance or collateral protection insurance, force-placed insurance is a type of policy that your lender may take out on your behalf to protect their financial interest in your property. Your lender may be allowed to take out force-placed home, auto and flood insurance policies.^[1]

When you take out a mortgage or auto loan, you generally must agree to maintain a certain amount of insurance coverage. As a result, you are likely in violation of your loan agreement if you maintain insurance that doesn’t meet the minimum requirements laid out by your lender, fail to pay your premiums and allow your lender-approved policy to lapse or fail to secure new coverage if your existing policy is canceled or nonrenewed.

In this case, your lender may buy a policy to insure your property and pay the premiums up front themselves. However, your lender will then pass the cost of the policy on to you by raising your mortgage payments or taking extra money out of your escrow account. This could then put you at an increased risk of foreclosing on your home or having your car repossessed if you can't afford the increase in your monthly loan payments.

What Does Force-Placed Insurance Cover?

Force-placed home insurance may exclusively include dwelling coverage, meaning it may leave you completely on the hook for personal property or personal liability claims. In addition, since your lender may only be concerned about the structure of your home to the extent that it is collateral for your loan, they may only purchase enough dwelling coverage to pay off the rest of the loan after a covered loss, which may not be enough to rebuild your home in the event of a total loss.^[2]

Meanwhile, a force-placed auto insurance policy must at least meet the minimum car insurance requirements in your state. This means it should include liability insurance in almost every state and may also include other coverage types like uninsured and underinsured motorist coverage, personal injury protection (PIP) and medical payments coverage (Medpay). In addition, force-placed auto insurance will likely include comprehensive and collision coverage, which aren’t required by law but are usually required by lenders.

How Much Does Force-Placed Insurance Cost?

Even though it often provides less coverage, force-placed insurance may be twice as expensive as an ordinary insurance policy.^[3] As a result, you could expect to pay around $3,600 per year for force-placed homeowners insurance and around $4,000 per year for force-placed full coverage car insurance assuming you have a good driving record and credit score.^[4][5]

One potential explanation for why force-placed insurance premiums can be so high is a concept known as reverse competition. This means there are no competitive market forces at play to drive prices down for consumers because the people responsible for selecting force-placed insurance policies are the not same people who are responsible for paying for those policies.^[6]

In addition, force-placed insurance companies may extend coverage to your property without inspecting it or looking into your loss history. As a result, they may charge you higher premiums to offset the potential risk of insuring your property without assessing the actual risk.^[7]

How Do I Avoid Force-Placed Insurance From a Lender?

The best way to avoid having to pay for a force-placed insurance policy chosen by your lender is to buy your own insurance policy and make sure you can easily show proof of coverage to your lender in case a dispute ever arises.

If you’re worried about missing a payment and allowing your policy to lapse, you could ask your insurance company if you can pay for your entire coverage period up front rather than making payments each month.

Some insurance carriers will even offer you a discounted rate if you pay your premium in full at the start of the policy period.

How Long Is Force-Placed Insurance Required?

Your lender maintains the right to take out an insurance policy on your behalf for as long as you still owe them, so force-placed insurance may be required until you finish paying off your loan or until you find an insurance policy yourself that satisfies your lender’s insurance coverage requirements.

What Should I Do if My Lender Gives Me Force-Placed Insurance?

If your lender is forcing you to pay for a collateral protection insurance policy, you should start shopping around so you can find a policy that meets your insurer’s requirements at a more affordable rate. SmartFinancial makes it easy to collect and compare quotes from multiple different insurance companies. Click here to get started on receiving a free homeowners insurance quote today.

After you obtain adequate home insurance coverage for yourself and present proof of insurance to your lender, they have 15 days to cancel the force-placed policy and refund you for any days when your new policy overlapped with the force-placed policy.^[2]

Alternatively, if you believe that your existing coverage is sufficient and that your lender purchased force-placed coverage mistakenly, then you may want to consider contacting an attorney or your state’s relevant regulatory body for further guidance.