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Force-placed insurance, also called lender-placed insurance (LPI) or collateral protection insurance (CPI), is a type of policy purchased by a lender when you fail to meet the minimum insurance requirements of a loan or lease. When compared with typical insurance coverage, force-placed insurance is almost always more expensive, with worse protections for you. Force-placed insurance is most commonly purchased to meet the requirements for home and auto loans.
How Does Force-Placed Insurance Work?
When you finance the purchase of a car or home, you're typically required to buy and maintain a certain level of insurance—lenders require it in order to protect their investment until you've paid off your loan. And if for any reason you fail to meet this requirement, your lender may buy force-placed insurance to protect their investment and make you pay for it by adding the cost to your monthly loan payment.
Force-placed insurance tends to provide little or no protection to you—it's designed to protect the lender's financial interests first. For instance, a force-placed insurance policy on a home may cover your home's structure but leave out personal property coverage. It also usually costs much more than regular home insurance, and you can't shop around for the best price—your lender will choose the insurance company.
As such, we strongly recommend that you purchase coverage that meets your lender's requirements yourself, in order to assure that the coverage is the most affordable option that meets your needs—and your insurer's.
Which Types of Insurance Can Be Force-Placed?
The most common types of insurance to be force-placed are homeowners insurance and auto insurance, though flood insurance is sometimes force-placed as well.
Force-Placed Home Insurance
Force-placed home insurance will usually only provide a minimal level of protection for your property. Usually, that means the structure of your home will be protected, though personal property inside—which is covered by typical homeowners insurance—may not be. Additionally, it's possible that your force-placed homeowners insurance won't include liability coverage, either.
For home insurance, U.S. CFPB regulations put in place in the Dodd-Frank Act require that insurers give you 45 days' notice by letter or other written method before charging you for force-placed insurance.
Force-placed homeowners insurance is different than mortgage insurance. Mortgage insurance is another type of coverage that protects your lender if you default on your mortgage, and it may be required by your bank if you made a smaller down payment.
Force-Placed Flood Insurance
Homeowners who are required to purchase flood insurance as a term of their mortgage, but do not do so, may be force-placed into a flood insurance policy by their lender. Your mortgage company may opt for NFIP or private flood insurance. NFIP rates are set by the government, so it's possible that force-placed flood insurance will be the same price if your lender opts for NFIP coverage.
Even though flood insurance protects your home, it's not subject to the same rules as force-placed homeowners insurance.
Force-Placed Car Insurance
It's easy to accidentally end up with force-placed auto insurance, because it's possible to have car insurance that provides enough coverage to register and legally drive your car but that doesn't meet your lender's requirements, in which case you'd be issued force-placed car insurance.
There are many parts to a car insurance policy, including liability protection, bodily injury and damage to your car, but your auto lender is primarily concerned with the comprehensive and collision coverage. Most car loans and leases require those coverages, and if you don't buy them (or remove them from your policy), you're likely to have those coverages force-placed onto you. Make sure you're meeting your lender's requirements to avoid extra charges.
What to Do If You Have Force-Placed Insurance
Carrying force-placed insurance is never going to be a better option than purchasing your own insurance, so if you have force-placed insurance on your home or car, you should work quickly to remove it. Your mortgage or auto lender believes that you don't have sufficient coverage to meet the terms of your loan, but there are multiple possible reasons for that. You'll need to contact your lender and your insurance company and figure out the cause. It may be that you have sufficient coverage and your lender simply lacked a record of it, that your coverage levels don't match the requirements or that your coverage ended without your knowledge.
Reasons Why You May Have Been Issued Force-Placed Insurance
- Your insurance coverage lapsed due to a missed payment.
- Your policy ended and you did not renew it.
- Your lender does not have proof of your insurance policy.
- Your coverage does not meet the minimum amounts required by the loan.
- You switched insurers but the loan company was not notified.
Once you've determined the cause of the issue, you can work to rectify it. If you do have sufficient coverage and the issue was due to a lack of documentation, you can typically send proof of your insurance coverage over to your lender and the problem will be resolved. In this case, you'll usually be refunded any premium for force-placed coverage.
If you have force-placed insurance because your insurance coverage ended and you need to buy a new policy, do so promptly. Force-placed coverage is likely to provide far less coverage than a normal insurance policy, especially in the case of auto insurance. A force-placed auto insurance policy may only include comprehensive and collision coverages, which do not meet the legal insurance minimum to drive in most states. Driving your car without proper insurance is illegal and can have serious consequences.
Regardless of the reason your lender used force-placed insurance on your property, you should pay the force-placed insurance bill (unless you're able to completely resolve the issue before payment is due). Failing to pay the bill could put you in violation of the terms of your loan. At that point, your bank may require you to pay the entire balance of the loan, repossess your car or sue you to reclaim the lost funds—all of which are far more costly to deal with than one extra bill. It's far better to pay the extra insurance premium, rather than risk losing your car or home altogether. You can typically get a refund for unused premium, once you've provided proof of your regular insurance coverage.