Today, getting a mortgage to buy home or a loan for a vehicle purchase is a commonplace. One of the main reasons why banks and finance providers are comfortable with lending large sums of money is that houses and cars are good enough collaterals for loans and they can repossess them if the borrower doesn’t make the payments. And secondly, both properties and vehicles are insured for damages that may come to them, providing extra security for the lien holders.
Almost all mortgage or loan agreements clearly specify the requirements to insure the collateral to the loan and what happens if the borrower (the home or vehicle owner) doesn’t comply with these requirements. Usually, people meet the requirements and provide a proof of insurance to their loan providers. Then, everyone is happy and no further action is taken.
What is Lender Placed Insurance?
When the policies that cover the asset that is the security for a loan lapses or never bought, the lender has no choice but to step in to protect their money. They do this by buying an insurance policy to cover their loan. In other words, they force place insurance coverage (that should have been bought by the borrower in accordance with the terms of the finance) and insurance premium added to auto loan payments. They can buy a policy from the date the policy lapsed. This backdating can cost you even more money.
These policies are based on protecting the lienholders and usually companies have agreements with one or two insurers to cover these assets. In a way, it is a group cover, rather than a private policy and the policy schedule is issued for the lender, even though the borrower ends up paying for it.
Problems with Force-Placed Insurance
Lenders may be forcing the coverage onto borrowers but they are forced to force it in order to protect their investment (the mortgage or loan). Insurance is technically what makes the lending possible. Without the protection of an insurance policy financial institutions probably have to charge much higher interest rates to insure themselves against the possibility of losing the collateral totally and not getting their money back.
The obvious problem for the home and vehicle owners is that their finance providers will only care to protect their own interest (the loan). The forced policy will not provide liability coverage for the vehicle or homeowner and don’t provide home content coverage.
These lender-placed insurance policies can be as much as 5 times more expensive. There are several reasons for this. First of all, the companies aren’t obliged to find the best deals. Secondly, they may be getting as much as 30% commission from the insurers they work with. Thirdly, the insurer provides a sort of blanket coverage since the lender makes the request. That is why the price is usually based on worst driver or homeowner profile since carriers don’t have enough information about them.
Force Placed Insurance Auto
When you have a loan on your car you are required to buy comprehensive and collision coverage on top of the legally required liabilities coverage. It is wise to have gap coverage too but you may not be required to do so. This full coverage policy protects both you and your loan provider in case something happens to the automobile.
If you don’t buy the required cover or let it lapse for whatever reason your lender would seek to enforce it. Finding the policy you arranged insufficient can be a reason for a forced coverage too. They would usually send you a letter asking to provide proof of insurance. If you comply with this request and buy sufficient coverage they will leave you alone. Otherwise they would place a forced policy and you will pay for it.
The best option would be to arrange coverage yourself and ask your insurer to stop the forced policy. You cannot drive with forced auto insurance because it doesn’t cover state required liabilities. Simply, you are forced to buy full coverage car insurance if you have a loan.
A lender forced policy usually for the loan amount and not how much the vehicle is worth. If the value of the vehicle is higher than the loan amount you may lose out in case it is totaled. Also, it usually doesn’t include vehicle owner’s liability coverage. It essentially provides collision and comprehensive coverage.
They can only force a policy onto you for the days that you don’t have insurance. As soon as you buy a new policy the lender has to stop the force policy from the date your policy started and refund any premiums charged in advance. You will still have to pay for the time on risk for the period you didn’t have insurance. If they placed a forced policy even though you had coverage, they will have to cancel it and cannot charge you for it or have to refund the moneys they have taken.
How to Avoid Forced Placed Insurance
Usually, agents or online quote forms ask you about the loans or mortgages you have and include the interest of the finance provider on the policy. Your insurer may send a copy of the policy to that company for you. Alternatively, you can send a copy of your policy to the lender. This will make sure that they don’t take any action against you.
Next, you need to make sure that your policy remains in effect to avoid a forced policy that cost you several times more. It is your responsibility to make sure that your vehicle is always insured. Remember that it is possible to check if an automobile is insured or not these days. Furthermore, your insurer would probably notify the lien holder when a policy lapses.