It goes by many names, but if you own a home and fail to maintain fire and hazard coverage the mortgage lender can “force” insurance upon you. Most all mortgage documents include a clause providing that if the borrower does not maintain fire and hazard (aka homeowner’s – or homeowners’ if you prefer) insurance, the lender may secure the insurance itself and then demand that the property owner reimburse it for the cost. The purpose of this loan provision is of course to ensure that the property is insured at all times, and if damage occurs insurance exists to pay for repairs or replacement of the building(s).
Homeowners should keep their own fire and hazard insurance at all times, because the problems with force-placed insurance go beyond needing to repay the lender the cost of the premiums. The negative consequences of force-placed insurance include:
1) Failure to maintain fire and hazard insurance would likely be a violation of the mortgage contract. As a result, depending upon the terms of the particular mortgage, a lender could foreclose against a house if insurance is not maintained.
2) The cost of force-placed insurance can be two or three times the cost of an insurance policy maintained by the homeowner. Worse yet, the property owner can expect to receive a bill from the lender for the cost or the insurance soon after the force-placed policy is secured.
3) Force-placed insurance provides coverage only for the building and fixtures (plumbing, electrical, etc.), but NOT for the CONTENTS of the house. When a homeowner purchases fire and hazard insurance for his or her house, personal property insurance is also included so in the event of a fire or other loss the cost of replacing personal property – such as clothing, furniture and jewelry – will be covered. However, force-placed insurance ordinarily does not include personal property insurance, so while the bank has the funds available to rebuild or repair the building, the homeowner will not be able to seek insurance reimbursement for his or her personal property.
The bottom line is that homeowners must do all they can to make sure their fire and hazard and insurance does not expire, or they risk the danger of additional cost or worse.