Keep up with your insurance — or your lender will

April 1, 2011

One of the dirty little secrets of borrowing money to buy your home is that your lender has the legal right to insure your home against fire, casualty and flood and stick you with the bill.

That legal right arises from a clause in virtually all deeds of trust that, in effect, states that it is up to you to provide your lender with written evidence that your fire/casualty/flood insurance is in full force and effect. If you fail to provide this written evidence every year, your lender has the right to buy that “force-placed” insurance from its own insurance affiliate, typically at exorbitant rates, many times your regular annual premium. The lender then adds that premium to your monthly mortgage payments.

You can avoid the cost and hassle of force-placed insurance by being vigilant in making sure that you not only keep your insurance in force but that you make sure your insurance agent sends a written certificate attesting to such coverage to your lender every year at renewal time. If you refinance, be sure your insurance company sends the statement to your new lender.

Force-placed insurance can be imposed on you for your regular homeowner’s fire and casualty policy, and for flood insurance if your home is in a designated flood plain. If you are required to have flood insurance you need to provide evidence of both policies in the form of a standard certificate of insurance from your insurance agent. These certificates are in a standard format and must name as an additional insured your lender, its successors, and/or assigns and must contain the specific address that the lender provides for delivery of these insurance certificates. You cannot just mail them in with your monthly mortgage payments. Insurance companies almost never charge anything for providing these certificates of insurance.

Since it such a simple matter to comply, why is it such a serious problem? The answer lies in the disconnect between the parties involved in complying: the lender, the homeowner and the insurance agent. At settlement, you are required to pay for a fire, casualty and, if required, flood insurance policy for a full year in advance. Those policies will typically automatically renew each year so long as you continue to pay the annual premium or until you notify your insurance agent that you wish to cancel or change the policy.

Your lender will not allow the loan to close until they are satisfied that they will be protected against fire, flood or other casualty for at least one year after closing. Problems can arise in subsequent years If your loan or the servicing of your loan gets sold or transferred to another lender. Even if your insurance agent sends out annual insurance certificates, The agent may not receive any notice about the change in servicers. And you may not know about this disconnect until (if you’re fortunate) you receive a threatening letter from your lender warning you to either send in your evidence of insurance or incur the penalty of force-placed insurance.

The solution is slightly more complicated when your home is a condominium or is in a homeowner’s association that carries blanket fire/casualty or flood insurance policies covering the entire development. In those cases you will likely have to contact your management company to find out who handles your collective insurance and then contact them to coordinate having them send a certificate of insurance to your lender.

If you fail to comply— or the lender fails, for any number of reasons, to receive your certificate of insurance in a timely manner, your lender will contact its force-placed insurance affiliate, often just a captive company owned by your lender and set up for the express purpose of issuing these policies. This carrier will then issue a force-placed insurance policy on your home, send the bill to your lender who will in turn add that premium to your monthly payment.

You could even end up paying for two policies at once — the one you purchased after shopping for a competitive price, plus the force-placed policy imposed by your lender, with its outrageously inflated premium.

In the District, Maryland and Virginia, insurance companies must be licensed to sell insurance, but they can set whatever premium rates they want as long as they file them with regulators. Once rates have been filed, the insurance companies are required sell coverage at those filed rates. But confirming that the insurance companies are complying with their filed rates is no easy task.

After numerous calls to a lender that was threatening to impose forced-place insurance coverage on a beach condo that I own, I was unable to learn the cost of that threatened coverage. The best the lender’s employees could offer was that once the policy is issued the computer calculates the premium. The employee could not identify anyone in his company or any affiliated organization who was responsible for quality assurance that these computer-generated rates comply with that company’s filed rates.

Calls to all three local insurance administrations were also useless in locating the “filed rates” for force-placed insurance. All three responding representatives were quite apologetic that they were unable to readily provide any actual filed force-placed insurance rates, admitting that it would take days of research.

According to Michelle Phipps-Evans, supervisory public affairs specialist with the District’s Department of Insurance, Securities and Banking, that department had embarked on a project to make all filed insurance rates available online, but those rates are not yet available.

Forced-place insurance complaints can be filed with your jurisdiction’s insurance administration. In Virginia it is the State Corporation Commission’s Bureau of Insurance www.scc.virginia.gov; in Maryland contact the Maryland Insurance Administration, property and casualty unit, mdinsurance.state.md. In the District of Columbia, the Department of Insurance, Securities and Banking, disb.dc.gov, investigates consumer complaints.

Harvey S. Jacobs is a real estate lawyer in the Rockville office of Joseph, Greenwald & Laake. He is an active real estate investor, developer, landlord, settlement attorney and lender. This column is not legal advice and should not be acted upon without obtaining your own legal counsel.

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