About Force Placed Insurance

What Is Force Placed Insurance?

Whether it is called Lender Placed Insurance, Collateral Protection Insurance or Force Placed Insurance, this is coverage obtained by a lender to protect its security interest in loan collateral where the borrower has failed to maintain insurance in accordance with the language in the loan agreement.  Force placed insurance is secured and paid for on an individual loan basis when the borrower does not maintain insurance.  The costs for the force placed insurance policy are paid to a force placed insurance provider by the lender who in turn collects the money from the borrower who let the insurance lapse.

Why Is Force Placed Insurance Important?

Reduce loan charge off’s - When a borrower does not maintain insurance on loan collateral, the lender experiences substantial exposure in the form of uninsured loan collateral.  In most cases, if the collateral securing the loan experiences a physical damage loss and is not insured, the borrower will stop making payments and a charge-off will result.

Compliance - Due to recent Dodd-Frank legislation in conjunction with catastrophic losses throughout the United States, lender examiners have been instructed to closely scrutinize all procedures lenders have in place to guarantee that the borrower maintains adequate insurance throughout the entire term of the loan. Examiners and auditors have been especially concerned with flood insurance.  Their concern is not directed so much at proof of insurance requirements at loan closing, but rather making sure the lender has a comprehensive system in place to identify if the borrower has cancelled, lapsed or non renewed the required insurance at any point after the loan closing.  Recent legislation now requires lenders force placed insurance programs to follow a highly specified set of procedures.  Since lender systems are designed to service loans and not monitor insurance status most are in capable of handling the new requirements without creating substantial exposure.

Borrower Good Will - Force placed insurance is important not only for protecting the lender, but also the borrower.  Although the responsibility to maintain insurance ultimately belongs to the borrower, most lenders understand the importance of securing insurance on behalf of their borrowers who neglect to do so themselves.  This is especially the case with our client base of community and regional lenders who strive to provide exceptional service to their borrowers and “do the right thing.”  When a borrower forgets to pay their insurance bill, has their insurance cancelled or non renewed and experiences physical damage loss to their collateral, they will appreciate that the lender secured insurance for them.  Without force placed insurance, this borrower would face a substantial financial setback by having to continue to make loan payments for their loan on collateral they can no longer use.

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