Understanding Force-Placed Insurance for NYC Property Owners: Protect Your Investment

Have you received a notice about force-placed insurance on your property? If so, you’re probably paying too much money for insufficient protection. This article explains what force-placed insurance is, why these policies are put in place, and how to protect your financial investment.

What Is Force-Placed Insurance?

“Force-placed insurance” sounds like something you get whether you want it or not, and that’s basically true. Unless you purchase a property with cash, you need insurance. We’re not talking about the importance of protecting yourself against sudden loss. (This “need” applies whether you own your property outright or not.) If a bank or other lender is involved, you must insure the property to protect their financial investment. Otherwise, the bank or lender will take out a policy on your behalf.

That policy is “forced” upon you. It may be called force-placed (aka bank-placed), creditor-placed, lender-placed or collateral protection insurance, but whatever it’s called, the lender chooses it to protect themselves.

Lenders take this action to protect their interests if the property owner’s insurance policy has lapsed, is canceled, or is deemed insufficient. For example, if the property sits in a flood zone, a lender may force-place flood insurance on the property if they don’t think the owner’s policy provides sufficient coverage.

The bank or lender buys the insurance policy on your property, and you pay the insurance premiums. However, you receive no protection.

The Differences Between Force-Placed and Standard Building Insurance

These policies only cover the lender’s investment. They typically do not cover your personal items, and they don’t include liability protection. Plus, force-placed insurance policies usually cost much more than a policy that you secure—one that actually protects your interests.

If, say, the building is destroyed by fire or a natural disaster, force-placed insurance pays the lender. The owner receives nothing. Because the insurance only protects the lender’s investment in the property, other types of claims, such as liability, loss of use, loss of income, and others, typically aren’t covered.

There are three major drawbacks to forced-place insurance:

• Policies typically cost more than building insurance.
• Force-placed insurance only protects the lender’s financial interest, not the owner’s.
• Coverage is limited and doesn’t include liability or personal property.

Financial Impact of Force-Placed Insurance

For a building owner, forced-placed insurance is only slightly better than no insurance at all. If a building is destroyed and forced-placed insurance pays off the lender, the lender won’t come after the owner for the balance of the loan. But these policies offer little or no protection beyond that.

How to Avoid Force-Placed Insurance

The easiest way to avoid force-placed insurance is to avoid the factors that usually trigger such policies. Lenders usually mandate force-placed policies for the following reasons:

• You canceled your insurance policy.
• You let your insurance policy lapse.
• Your insurance policy doesn’t meet your lender’s minimum requirements.

If your lender has force-placed insurance on your property, you should receive a notice to this effect. You should replace this policy as soon as possible by contacting an insurance carrier or broker. Chances are, you’ll be able to buy a policy that protects you and your property for significantly less money.

Force-Placed Insurance: An Example

We reviewed a building that was insured through another company, and the bank had added force-placed insurance by mistake. Not only was the policy expensive, but the policy also covered much less than the actual value of the building. Had the building been destroyed, the owner was unprotected and could also have been liable for the lender’s financial loss.

We showed the owner options for a much more comprehensive policy that would protect her, as well as the lender, at a competitive price.

Need to Replace Force-Placed Insurance?

If you receive a notice that a lender is purchasing force-placed insurance on your behalf, don’t delay. Consult a knowledgeable insurance agent or broker right away. They can review your loan documents to determine what triggered the force-placed insurance (if it isn’t in the lender’s notification), recommend and help you purchase the right policy, and provide proof of the new insurance policy to your bank or lender.

For questions about force-placed insurance policy or for a no-obligation policy review, contact our office at 877-576-5200.