After receiving complaints about force placed insurance in California, state regulators have responded to this purportedly abusive practice.

The issue comes up sometimes for homeowners who are still paying off their mortgage.

Typically, lenders require mortgage borrowers to take out a homeowner’s insurance policy on the subject property.

Such policies protect the lender’s interest in the property, which is generally used as collateral for the mortgage.

To protect the lender’s interest even further, it may link a force placed insurance policy to the loan.

Force placed insurance, also known as lender placed insurance, is a policy that automatically goes into effect when and if a homeowner fails to meet the insurance requirements in their mortgage agreement.

That can happen if the homeowner lets their own homeowner’s policy lapse, or if the policy they buy fails to meet the lender’s specific requirements, or if they simply fail to provide the lender with timely proof that they have their own homeowner’s policy in place.

The problem with such policies is that they’re often much more expensive than policies the borrower would buy for themselves on the open market. At the same time, they tend to provide significantly less coverage than the homeowner’s own policy.

Force placed policies may be limited to fire and similar hazards, without covering ancillary losses like personal property, liability or the cost of additional living expenses.

Aggravating the problem is the fact that some lenders and insurers have an incentive to overcharge borrowers for force placed insurance in California.

Occasionally, insurers will arrange to pay a lender a fee – variously described as a “commission” or a “kickback,” depending on who you ask – in exchange for linking that insurer’s force placed policies to the lender’s mortgages.

What’s more, some lenders have been known to hold ownership interests in the insurance companies whose force placed insurance policies they use.

Consumer advocates object to business relationships like these. They say these agreements align the companies’ financial interests against those of the borrower, making borrowers vulnerable to abuse.

Lenders who have a relationship with the insurer have no incentive to keep costs of that insurance low for the borrower – in fact, those lenders may get more money by keeping borrowers’ costs high.

Getting Force Placed Insurance in California Under Control

Reports of such questionable financial deals between lenders and insurers eventually got the attention of California regulators.

In 2012, California Insurance Commissioner Dave Jones contacted the ten largest providers of force placed insurance in California, directing them to make a rate filing with the state Department of Insurance to reduce their rates.

On direction from Commissioner Jones, the Department looked at the insurers annual financial statements. They reported finding the insurers’ loss ratios were low, suggesting that their rates may be excessive.

In one case reported to the state Department of Insurance, a borrower reported he had been required to pay for force placed insurance in California even though he already had his own policy in place.

The borrower said he had been charged a total of nearly $10,000 for force placed insurance for the previous year and for a renewal policy for the year just beginning.

Fortunately, the Department of Insurance contacted the insurance company and questioned the propriety of what they were doing. The company then issued the borrower a full refund.