It’s so controversial and yet so vital to the financial industry’s recovery. They’re commonly called Force Placed Policies…Tristar MGA calls them Lender Placed Policies or LPI for Lender Placed Insurance.
Insurance is a transfer of risk from one entity to another in exchange for payment. It is a form of risk management that protects the financial industry from loss and when used as intended protects borrower as well. When a borrower has been “Force Placed” or when a financial institution has purchased a “Lender Placed” policy they are protecting their interest in property that has been used as collateral for a loan. This is intended to be utilized when the borrower has not purchased insurance for the property themselves. However, it is sometimes applied because the borrower has not complied with their contractual obligation to provide the appropriate documentation showing the property is insured. If that is the case, the lender placed policy can be cancelled once the appropriate documentation has been provided.
There are many myths about lender placed insurance mainly because of misunderstandings. Our Team fights these daily as we work to inform our borrowers about the process.
Myth #1 – Your Financial Institution loves and benefits from forcing insurance on you. No, they don’t – they HATE it. Most financial institutions DO NOT receive any financial benefit from lender placed policies. NONE of our clients do. Financial Institutions that receive kick-backs or fees have found themselves in court lately and that situation will hopefully be corrected. This is NOT the norm though – just the part that makes the news. Lender Placed Policies are costly and time-consuming for your Financial Institution and they will do anything they can to prevent this process kicking in…including faxes, phone calls to agents/insurers, and letters sent to the member’s asking for help in obtaining proof of insurance.
Myth #2 – Force Placed Insurance is NEVER justified. In exchange for the transfer of money from the financial institution to the borrower, the borrower signs a form called ATPI – Agreement To Provide Insurance wherein the borrower agrees to provide proof that the property they are using as collateral is sufficiently insured against loss. In the event loss does occur and the collateral is destroyed, the financial institution needs to protect themselves against the risk of an unsecured loan. If the borrower choses not to provide insurance for their property, either because they are financial unable to do so or because it is not available for their property or location, the lender is being responsible in providing that insurance for them.
Myth #3 – The borrower does not benefit from Force Placed Insurance. It’s true that the Lender Placed Policies primarily protect the financial institution’s interest in the property but the borrower also benefits. When the borrower is not able to provide insurance for their property, the lender placed policy will provide a measure of security. If catastrophe strikes and the property is destroyed, the lender placed policy may pay-off the loan so the borrower no longer owes money for a property they are now going to have to replace. Another possible scenario is that the property is severly damaged, the borrower will then have the right to file a claim against the lender policy to repair their property.
Myth #4 – If my financial institution forces insurance on me, I don’t have to pay it. Financial Institutions contractually have the right and responsibility to lender place insurance if the borrower does not protect the property securing their loan. This benefits the borrower in that they now have a measure of protection and it brings them into compliance with the original requirements of the loan. It is an expense they agreed to when they closed the loan and signed the ATPI – that is an agreement to provide insurance. The expense related to insuring the property belongs to the borrower.
Myth #5 – Force Placed Insurance is unreasonably expensive. It is expensive and we tell everyone who will listen that it’s expensive. It also provides less coverage than policies purchased in the market because there is no personal property coverage or liability coverage. However, it is not unreasonably expensive. Lender Placed Insurance is intended to insure high risk properties. There is an underlying assumption that if you could insure the property on the market you would do so…in fact, borrower’s are strongly encouraged to do so by our staff. However, if insurance is not available because the risk for that property or location is too high then a lender placed policy can be provided. Lender Placed Policies are only meant to be generated for those borrowers who could not provide the insurance on their own and that usually means the risk was too high for the insurance market to accept. Higher Risk means greater expense because it also means a higher likelihood of claims.
Lender Placed Insurance isn’t fun for anyone involved but it does provide a vital service to the financial industry as well as borrowers who are unable to provide insurance for their property on their own. We have had borrowers call in asking for a lender placed policy because they searched and searched and were unable to obtain insurance on their own but understand the benefits of risk management.
Tristar MGA services are personalized enough that, provided we have sufficient information, we are ready and able to do what it takes to get the documenation we need to prevent lender placed policies.
But if they are unable to obtain insurance, we are here to provide it.