What is Lender-Placed Insurance?
insurance is a group policy where an insurer issues certificates of
insurance to a bank or mortgage servicer when the consumer’s own
insurance policy may have lapsed or if the lender deems the
consumers’ insurance to be insufficient.
When a loan agreement
is made with a bank or a lender, generally the lending document
includes a stipulation requiring property insurance, often referred to
as hazard insurance, on the property. The contract will spell out
specifically what must be covered and how proof of coverage is to be
submitted to the lender or the company servicing the loan. This is why,
when insurance is purchased for a home or car, the insurance agent asks
if there is a lienholder and the lender’s name appears on a
declarations page. If a consumer cannot provide proof of coverage, a
lender can ask the insured to place insurance on the property in
accordance with the terms of the lending contract.
Consumers may not
realize, but a mortgage for a home located in a National Flood
Insurance Program Special Flood Hazard Area will require flood
insurance. If this is a requirement of the mortgage contract and it is
not purchased, the lender can purchase the coverage and require the
consumer to pay for it.
Why is it Important to Understand
insurance premiums are higher than the property insurance a borrower
can purchase on their own and consumers are billed by the lender for
the cost of a lender-placed policy.
A lender will try to
verify coverage before it acts to insure a collateral property and it
will also notify the consumer of the action to insure the property. Be
aware the standard mortgage loan contract allows a lender to secure
property insurance back to the date they last show it was covered by
the consumer’s personal policy. This could result in a large bill
for a more expensive insurance policy.
In addition to being
more expensive, the lender-placed insurance policy also has limited
coverage. For example, these policies generally do not cover personal
items or owner liability. If a borrower does not pay the lender-placed
insurance policy premium, they could be at risk of foreclose.
Why Are Regulators Reviewing this
Type of Business?
is the key regulatory concern, because the consumer is forced to pay
the premium on a policy selected by the lender. Under this practice the
lender is not motivated to select the lowest price for coverages
driving up prices for consumers. The NAIC, as well as regulators in
Florida, California, New York and Texas, recently held public hearings
to learn more about these products and practices.
What Can Consumers Do To Avoid
Consumers fail to
maintain the required coverage for a variety of reasons —
cancellation, a lapse in coverage or even just a simple oversight.
Paying insurance premiums on time and reviewing the paperwork received
from the insurance company and the lender is the most important
protection from lender-placed insurance.
In the case of a
mortgage, the premium for lender-placed insurance can be taken directly
from an escrow account. Any change in payment should be an alert to a
possible insurance-related issue.
Many lenders use
third-party companies to process payments and insurance information. If
paperwork is not processed in a timely manner, or if verification of
coverage is mistakenly sent to the wrong address, the lender may not
realize the property is adequately covered and secure lender-placed
coverage. It is important to check lender information on a policy's
declarations page, and carefully review all statements received from
If changing insurance
companies, it is important that there is no interruption between
policies. It is also a good idea to notify the lender of any change and
provide proof of coverage directly, instead of waiting for a copy to be
mailed from the new insurance company.
The members of the
NAIC continue to review the use of lender-placed insurance. Information
about their work is available to consumers on the NAIC website.
If you have questions or are confused
about your insurance
contact the Arkansas Insurance Department Consumer Services Division
at (800) 852-5494 or (501) 371-2640.
Get smart about your
insurance needs! More information about
auto, home, life and health insurance options — as well as tips
for choosing the coverage that is right for you and your family —
is located on the NAIC Web site, www.InsureUonline.org.