Lender-placed insurance coverage is a type of policy placed by a financial institution on a home or property when the borrower fails to maintain personal coverage.
Inadequate Coverage
Mortgages require borrowers to have adequate protection on their property. Sometimes an owner fails to meet the requirements, and the lender needs to protect its financial interest in the property by force-placing another policy. Possible circumstances where this is necessary include the following:
- The owner has insurance, but it does not provide sufficient protection.
- The insurance company cancels the owner’s existing policy for various reasons, such as increased risk, too many claims, a criminal record or missed payments.
- The homeowner failed to obtain coverage.
- The owner did not provide proof of insurance to the lender.
- New flood zones include the property, and the owner is unaware of the extended protection needs.
Force-Placed Protection
Lienholders have the right to protect their financial assets. Lender-placed insurance coverage safeguards the bank, the property and the homeowner. They typically cover only the amount due to the lender but do not include liability or personal property protection. Future mortgage payments reflect the cost of this additional insurance.
When an owner has an expired or insufficient policy, mortgage lenders need to protect their financial interest in the property by obtaining coverage.