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 other 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.
These contracts clearly specify the requirements to insure the collateral and what happens if the borrower (the home or vehicle owner) doesn’t comply with these requirements. Usually, people meet the conditions and send a proof to their providers. Then, everyone is happy and no further action is taken.
What is Lender Placed Insurance?
When the policies protecting the asset (the security for a loan) lapse or never bought, the lienholder has no choice but to step in to safeguard their money and insure it themselves. In other words, they implement what the borrower should have done in accordance with the terms. They can buy it from the date it lapsed. This backdating can cost you even more money.
These policies are based on looking after the lienholders’ interest and usually they have agreements with one or two carriers. In a way, it is a group cover, rather than a private and the schedule is issued to the lender, even though the borrower ends up paying for it.
Problems with Force-Placed Insurance
Companies are taking this route because they have to do it in order to guarantee their investment (the mortgage or loan). Insurance is technically what makes the lending possible. Without such mechanism financial institutions probably have to charge much higher interest rates to safeguard themselves against the possibility of losing the collateral totally and not getting their money back.
The obvious problem for the owners is that their finance providers will only care to protect their own interest. The forced policy will not provide liability and home content coverage.
These lender-placed 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 carriers they work with. Thirdly, it is 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 Auto Insurance
When you borrowed on a car you are required to buy comprehensive and collision coverage on top of the legally required liability. It is wise to have GAP too but you may not be required to do so. This policy protects both you and the lienholder in case something happens to the automobile.
If you don’t buy the required cover or let it lapse for whatever reason they would seek to reinstate it. Finding your arrangement insufficient can be a reason for it too. They would usually send you a letter asking for proof. If you comply with this request and meet the requirements they will leave you alone. Otherwise they would step in to insure the vehicle and you will have to pay for it.
The best option would be to arrange coverage yourself and ask the company to stop the other. You cannot drive with forced car insurance because it doesn’t have state required liability.
A lender forced policy is usually for the loan amount and not how much the vehicle is worth. If its value is higher than this you may lose out in case it is totaled. Also, it usually doesn’t include vehicle owner’s liability. It essentially provides collision and comprehensive.
They can only impose the policy for the days you missed. As soon as you buy a new one they have to stop theirs and refund any premiums charged in advance. You will still have to pay for the time on risk. If they arranged one 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 Such Impositions
Usually, agents or online quote forms ask you about borrowings and include the interest of the finance company. The carrier may send a copy of it to them for you. Alternatively, you can send a copy yourself. This will make sure that they don’t take any action against you.
Next, you need to make sure that it remains in effect to avoid any surprises. It is your responsibility to make sure that the vehicle is always protected. Remember that they can always check its validity these days as the records are electronic. Furthermore, they would probably be notified if there was a lapse.