“Forced placement” is when a lender buys a policy for a borrower at premiums that can significantly increase the price of insurance.
If you fail to renew your own homeowner’s insurance and the lender finds out, they will automatically purchase this coverage for you. The new coverage is more expensive and doesn’t have the same coverage as your homeowner’s policy would.
J. Robert Hunter of the Consumer Federation of America, feels the problem began because lenders and insurance companies have “set up sweetheart deals… and get all sorts of kickbacks.” He stated that the price can double, triple, quadruple or worse. In some cases, increasing up to five or ten times the original cost.
Hunter also said that “Insurers do face added risk if they offer such policies without the usual underwriting. “ In certain cases, for example, with a homeowner facing foreclosure, home repairs might be skipped. This can expose the home to additional damage. Hunter says that the risk in a case like this justifies a ten to twenty percent premium increase. Many insurers however are increasing rates between 200 and 1,000 percent for similar situations.
Forced-placement policies are usually purchased for homeowners that are already suffering but they could also be the start to a problem. It is important to keep your homeowner’s policy current because if a forced placement policy is purchased it could be really difficult to get it cancelled. If you are unable to get it cancelled, then you might end up losing your home because their rates are so high that you can no longer afford the costs.