Force-placed insurance is a hot topic in today’s mortgage landscape. Across the country, lawsuits have targeted lenders and mortgage servicers that obtain insurance coverage for secured real property and charge the costs of that insurance coverage to the borrower. Recently filed cases have alleged that lenders artificially inflated force-placed insurance costs, imposed force-placed insurance on properties that were allegedly adequately insured, failed to reinstate borrowers’ homeowners policies before force-placing hazard insurance and wrongly imposed force-placed insurance policies that increased borrowers’ monthly payments, thereby causing them to default on their obligations. Plaintiffs’ counsel are actively pursuing class action and individual claims against lenders and mortgage servicers for the force-placement of insurance coverage.
The force-placement of hazard insurance, as opposed to flood insurance, is generally a contractual right of the lender. When taking a security interest in property, lenders often demand insurance against the risk of loss of the secured property. The Federal National Mortgage Association’s uniform mortgage requires that the borrower maintain insurance coverage, the amount of which is to be determined by the lender. If the borrower fails to maintain adequate insurance coverage, the mortgage provides that the lender has a right to obtain hazard insurance and to seek the costs of that insurance coverage from the borrower. This coverage is called “force-placed” hazard insurance. Because underwriting and coverage on force-placed hazard insurance is different from that of traditional homeowners’ policies, force-placed hazard insurance is often more costly and covers different risks than those policies. For example, a force-placed hazard insurance policy may not cover contents, but it also may not have the occupancy requirement of a homeowner’s policy.
Before force-placing flood insurance, the lender or servicer must send notice to the borrower allowing him 45 days to obtain appropriate flood coverage before force-placing pursuant to federal law. Any flood insurance the borrower obtains must meet the requirements of flood insurance in the National Flood Insurance Program. If it fails to meet these guidelines, then the lender has an obligation under federal law to force-place flood insurance that complies with federal mandates.
The Dodd-Frank Wall Street Reform and Consumer Protection Act has brought changes to many areas of the financial services industry, including force-placed hazard insurance. Under Dodd-Frank, a lender or servicer must have a “reasonable basis” for believing the borrower failed to maintain the required hazard insurance. Lenders and mortgage servicers may develop this reasonable basis by contacting the borrower and requesting documentation of the contractually required hazard insurance. Federal law details the contents of these communications with borrowers.