Understanding Lender-Placed Insurance (Force-Placed Insurance)

Today’s lender-placed insurance is a critical part of the U.S. mortgage finance system

Why is LPI (aka Force-Placed Insurance or Creditor-Placed Insurance) Necessary?

Almost all mortgage agreements require that homeowners maintain continuous insurance coverage on their property. Homeowners always have a choice to select their own coverage, but if a homeowner does not maintain the required insurance policy, the lender will obtain the necessary insurance to ensure the property (which serves as collateral for the loan) remains protected from damage or destruction. Insurance obtained by the lender is known as lender-placed insurance (LPI), also known as force-placed insurance or creditor-placed insurance.

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LPI protects homeowners and supports homeownership.

LPI protects homeowners' most important asset, their home. LPI supports homeownership by ensuring a home will always be protected and facilitating the mortgage process by removing the risk of uninsured loss for lenders, investors, and homeowners.

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Mortgages require homeowners insurance and LPI provides coverage regardless of the home’s geography or condition.

Lenders obtain LPI only when it is necessary. LPI covers any home that needs insurance, even those in high-risk flood or fire-prone areas, that other insurers may not be willing to cover.
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Homeowners always have the choice to obtain their own insurance.

The LPI process ensures clear and simple communication with the homeowner, stressing that they can, and should, obtain their own insurance policy. When a homeowner does not maintain the required insurance, lenders provide reminder notices that the homeowner must secure insurance on the property.

Steps to Avoid a Lender-Placed Policy

Did you receive a letter from your lender that they are unable to confirm insurance on your home? If so, you should take the following steps immediately to avoid the lender purchasing a policy for the property.

If you have coverage

Call your homeowners insurance company or agent to confirm there is coverage on your home and, as instructed by your lender, provide evidence of that coverage.

If you no longer have coverage

If you no longer have insurance coverage, take action immediately to obtain an insurance policy on your home. As instructed by your lender, provide them evidence of that coverage.

If you have recently changed insurance companies

Contact your homeowners insurance company or agent to confirm your new policy has your lender's information listed on the policy and, as instructed by your lender, provide evidence of that coverage.

If you are having trouble obtaining insurance

If you are having trouble obtaining insurance, your state FAIR plan may be an option. For more information about state FAIR plans, click here.

Lender-Placed Insurance Process

To secure a mortgage, borrowers must obtain homeowners insurance. When insurance is not maintained, Assurant will provide notifications reminding homeowners to provide proof of insurance. They do this on behalf of their mortgage servicing clients.

To learn more about how the lender-placed insurance process works and how to avoid it, watch this video.

 

Assurant’s Role in the Lender-Placed Insurance Market

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Assurant is the leading provider of LPI. We’re proud of the important risk management role we provide to support U.S. homeownership. To further understand this relationship, we asked Oxford Economics to analyze our product and provide more information about its role in the mortgage financing system. Oxford also studied the relationship between LPI and the socioeconomic consequences of a natural disaster. 

Oxford’s findings show, that following a natural disaster, the presence of LPI is associated with lower debt-to-income ratios, fewer mortgage delinquencies and lower federal disaster recovery spending. 

Oxford also determined that, although the cost of LPI may be higher than standard coverage, it is not significant enough to cause mortgage delinquency. Instead, because LPI is a risk management safety net for homeowners, lenders and investors, Oxford found that LPI’s role has a positive impact on mortgage approvals. 

Click here to download the Oxford Economics analysis report on lender-placed insurance.

Oxford Economics Analysis Report

FAQs on LPI (Force Placed Insurance)

What is the purpose of LPI?

If a home is damaged or destroyed (for example, due to a fire or natural disaster), and the home isn’t insured, the homeowner won’t have insurance coverage to help them complete repairs or rebuild. This means both the homeowner and the mortgage lender would lose any financial interest they had in the home.

Is LPI more expensive?

An LPI policy can be more expensive than the standard property insurance policy it replaces. LPI is available for all properties, even in the highest-risk areas. LPI is issued regardless of the condition or location of the property. As a result, insurance companies that underwrite LPI can have a higher exposure to potential claims, especially in locations with higher incidents of hurricanes, fires and other natural disasters.

Which laws regulate LPI?

At the federal level, the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010 put in place federal requirements to help homeowners understand their mortgage obligations and their choice to maintain their own insurance; including that homeowners are required to be notified at least 45 days prior to an LPI placement and a second notice is sent if the homeowner hasn’t responded. The Dodd-Frank Act also includes standards for terminating an LPI policy and issuing refunds when a homeowner has secured their own insurance coverage. In addition, the Flood Flood Disaster Protection Act and related regulations specify procedures for placing LPI in flood zones.

At the state level, LPI rates are reviewed by state insurance authorities. The National Association of Insurance Commissioners (NAIC) requires insurance companies to annually submit state-level LPI data for each state in which they operate.[5]

Is LPI regulated by consumer protection laws?

Yes, federal and state laws regulate LPI. State insurance regulators are responsible for overseeing LPI insurers and the LPI rates and coverages, and federal regulators  oversee the servicers that obtain LPI coverage for their portfolios.[4]

[4] https://www.gao.gov/products/gao-15-631

How many LPI policies are placed across the country?

LPI covers only 1 to 2 percent of all mortgaged properties.[2] LPI covers a property regardless of condition or location of the property and is always available to homeowners, even in high-risk areas where other insurance may be difficult to obtain.

[2] https://www.gao.gov/products/gao-15-631

Are homeowners required to accept the LPI policy?

Homeowners agree to maintain continuous insurance coverage on their home throughout the duration of their mortgage. If LPI is obtained to protect the home, it is canceled (as of the effective date of their new policy) when a homeowner provides proof of adequate insurance as required by their mortgage and the homeowner is refunded any overlap in premium.

What is lender-placed insurance (or force-placed insurance)?

When a buyer purchases a home, their mortgage contract includes a requirement to maintain continuous insurance coverage on the property. This requirement protects the home and provides security for the homeowner and lender if the home is damaged or destroyed.

For more information, click to view the definition from the National Association of Insurance Commissioners and additional information from the Florida Office of Insurance Information.

Are homeowners notified before LPI is placed on their property?

Yes. Homeowners are notified prior to the placement of an LPI policy – two clear notices are sent in a 45-day period before a lender obtains an LPI policy. These notices give homeowners the opportunity to secure their own insurance coverage before the lender places insurance as a backstop.

Why is LPI also called force-placed insurance or creditor-placed insurance?

LPI, force-placed insurance and creditor-placed insurance are different names for the same product. While there are older references to “force placed insurance,” LPI is never “forced” onto anyone. The homeowner agrees to maintain insurance coverage as part of their mortgage contract and always maintains the option to purchase their own coverage. If the homeowner does not maintain the required insurance, they are given at least 45 days’ notice and at least two clear letters reminding them of this loan obligation. LPI is only obtained by the lender to serve as a safety net to make certain the home is always protected.

Will be I be charged if I have a brief lapse in homeowners insurance coverage?

A short-term LPI policy may be placed to ensure continuous coverage if the coverage maintained by the homeowner lapses during a specific period of time.

What do I do if I receive a letter stating I need to provide proof of homeowners insurance coverage or my lender will place a policy?

Make sure you have your own insurance and send proof to your mortgage servicer.[3] Contact your lender for additional information.

[3] https://www.consumerfinance.gov/ask-cfpb/what-can-i-do-if-my-mortgage-lender-servicer-is-charging-me-for-force-placed-homeowners-insurance-en-219/

 

Need more information?

Lender-placed insurance, force-placed insurance and creditor-placed insurance are essentially the same. Here's a glossary of key terms associated with this coverage.
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