Florida Force-Placed Insurance May Lead to Higher Costs, Less Coverage for Homeowners By Tod Aronovitz | 07/16/13 | 0 Comment

Of all the Force-Placed Insurance (FPI) policies written, the state of Florida ranks number one, holding 35 percent of the total FPI policies in the country, a May article on Targeted News Service reported.

FPI, also known as lender-based Insurance, transpires when mortgage lenders or banks purchase insurance after the homeowners’ policies lapse or when it is determined that they are not sufficient. What many Florida residents may not realize is that there is a premium cost for FPI, usually higher than what would be paid for conventional insurance, and the homeowner is ultimately responsible paying those higher rates. In addition to being more expensive, there is often limited coverage, as personal items and owner liability are usually not covered. In some cases, owners have carried FPI without their knowledge or consent.

The practice of FPI, which increased during the mortgage and housing crisis in 2008, has recently been in the spotlight as states determine whether insurers and lenders are making “excess” profits and if “reverse competition” is taking place.  This market condition tends to ignore competitive forces and drives up costs for consumers because the lender chooses the coverage provider and amount, but the consumer is obligated to pay the cost of coverage.

The Florida Insurance Commissioner called a hearing in May to solicit public comment on this issue, and specifically, on the rate filing by American Security Insurance Company (ASIC), part of the Assurant Group.  ASIC, which has written almost 70 percent of the FPI premiums across the state, proposed no change in its rate structure.

According to J. Robert Hunter, Director of Insurance for CFA, former Texas Insurance Commissioner and a consulting actuary, “FPI insurers compete for business by larding premiums with expenses to provide kickbacks to mortgage servicers. The mortgage servicer passes the cost of the FPI on to borrowers, but takes a big piece of the premium in cash or subsidized services. The outrageous ASIC filing shows the results of reverse competition—massively excessive rates.”

Banks have agreed to settle in many recent FPI lawsuits alleging wrongdoing. In addition, a $25 billion national mortgage settlement brought last year, found that five servicers complied with the settlement, while others, like JPMorgan Chase, dragged its feet to cancel FPI policies within 15 days of receiving proof that a borrower carries adequate insurance on his own. Eventually, the institution voluntarily refunded premiums to some 2,000 borrowers on its books, but the trouble in Florida still continues.

“The proposed rates are a sham.  ASIC has filed a rate request 25 percent higher than they actually want so they can ‘settle’ for the 20 percent rate cut they were ready to accept all along,” said Birny Birnbaum, executive director of the Center for Economic Justice and a national expert on FPI. He believes that anything less than a rate cut of 50 percent will be unfair to consumers and a victory for Assurant.

What Can Consumers Do To Avoid FPI?

  • Paying insurance premiums on time and reviewing the paperwork received from the insurance company and the lender is the most important protection from lender-placed insurance.
  • In the case of a mortgage, the premium for FPI can be taken directly from an escrow account. Any change in payment should be an alert to a possible insurance-related issue.
  • Many lenders use third-party companies. Check lender information on a policy’s declarations page, and carefully review all statements received from the lender. If paperwork is not processed in a timely manner or if verification of coverage is mistakenly sent to the wrong address, the lender may not realize the property is adequately covered and secure lender-placed coverage.
  • If changing insurance companies, it is important that there is no interruption between policies. Also, notify the lender of any change and provide proof of coverage directly instead of waiting for a copy to be mailed from the new insurance company.

According to the Consumer Financial Protection Bureau (CFPB), there are rules that require transparency by the lenders. Consumers must not be surprised by FPI coverage and should receive advance notice, pricing information and the basis for which this insurance needs to be purchased.  If the FPI is purchased but proof is provided that it is not necessary, then the lender and insurer must terminate the policy within 15 days and refund the policy.

Members of the National Association of Insurance Commissioners (NAIC) continue to review the use of lender-placed insurance.

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