The Maryland Insurance Administration issued a consumer advisory this week, reminding consumers that lapsed insurance policies can lead to “lender-placed” or “force-placed” insurance that are often more expensive and limited in the scope and amount of coverage.
Regulators observed that if a consumer borrows money to buy a car or home and lets the insurance policy lapse (cease to exist/end), the loan agreement may give the lender the right to obtain insurance for the borrower and require the borrower to pay the premium.
This type of insurance coverage is called “lender-placed” or “force-placed” insurance. Often times, the premium for forced-placed insurance is substantially higher than it would be if the property owner obtained coverage directly from the insurer, regulators stated.
And even though the lender will bill the borrower for the premiums due under the policy, the coverage may only protect the lender’s financial interest in the property.
Force-placed or lender-placed policies are typically also very limited in the scope and amount of coverage, regulators noted. For example, some policies only cover the amount of the outstanding balance on the loan. For force-placed policies covering a home, damage to the dwelling may be covered only if caused by specific causes of loss, and generally, there is no coverage for personal property.
The Maryland Insurance Administration provided a few tips on what consumers can do to protect themselves:
• When borrowing money to purchase a car or home, give the lender the name of one’s insurance company, and give the insurance company the name and address of the lender so the lender can be listed as an additional insured.
• When the notice of cancellation or non-renewal is received, obtain a replacement policy as soon as possible. Be sure to tell the insurer the name of any property lienholder, and notify the lender of a new insurance policy. Even if the lender has already obtained a lender-placed or force-placed policy, the borrower has the right to purchase a policy with a company of your choice (likely at a lesser cost with coverages that are more beneficial to the borrower) and then have the force-placed policy cancelled.
• Read the terms of the loan agreement carefully to make sure to understand rights and responsibilities.
• Read all letters from the insurance company and lender in order to be aware of any changes in the circumstances that may impact the policy and loan.