What is Force-Placed Insurance?
Almost all residential mortgages require that the home be insured against causality, with the lender being a beneficiary. Such a requirement is not surprising. A residential mortgage involves lending a sizable amount of money, with the value of the home as collateral providing assurance to the lender of being repaid. Fire and other disaster risks the destruction of the collateral, and a bank would desire insurance for many of the same reasons an owner of a home free-and-clear would.
The ordinary practice is for the homeowner to procure homeowners insurance, naming the lender as an additional loss beneficiary. When this doesn't happen, the lender may act in its own interest and obtain a "force-placed" insurance policy. This is consequential to the homeowner and chapter 13 debtor for a couple of reasons:
- Bank acquired insurance tends to be more expensive, or significantly more expensive, than standard homeowner's insurance. This added cost is passed onto the borrower.
- Force-placed insurance seldom protects the homeowner's equity, the homeowner's personal property, or provides liability protection.
If homeowner's coverage has actually lapsed, it will usually be in the homeowner's interest to get new coverage as soon as practical. On the other hand, banks occasionally make errors in acquiring force-placed insurance when other homeowner's coverage already exists. In chapter 13 bankruptcy, such may need to be resolved through the claims objection process to avoid increased chapter 13 plan payments.