Force-placed insurance policies have become a hot topic of litigation especially in Florida. Florida accounts for more that thirty percent (30%) of force-placed insurance policies throughout the nation. These policies are placed by a bank or mortgage servicer on a home when the homeowners’ property insurance is deemed insufficient by the bank or the policy has lapsed. Many mortgages allow for these policies to be taken out when the homeowner fails to maintain adequate insurance and/or replace the insurance that has lapsed.
The problem here is that many of the banks are working with the insurance companies and buying insurance at much higher premiums than in the regular market. What does all of this mean for the consumer one might ask.
This means that in the case of foreclosure the bank will ask for what is left on the property plus the insurance cost which comes out to be much higher than if you had purchased the insurance on your own. Banks along with insurance companies are obtaining huge payouts due to these force-placed insurance policies.
Federal Housing Finance Agency (“FHFA”) directed Fannie Mae and Freddie Mac to prohibit mortgage servicers from being reimbursed for expenses associated with captive reinsurance arrangements</a>. These arrangements as mentioned above have caused growing concerns for both Fannie Mae and Freddie Mac as they are paying substantial fees on the force-placed insurance policies in foreclosure. These practices are also a major concern as they would make an already unsteady reputation worse as it relates to consumers and secondary mortgage buyers. This new restriction in the market makes it evident that servicers can no longer collect commissions from insurance carriers, which affords more protection to consumers.
Currently there is an enormous amount of litigation dealing with the practice of force placed insurance</a>. This litigation hopefully will help to close the current loophole that still allows insurers to provide value to banks that refer them business. The new restraints mainly affect companies like QBE and Assurant, while banks in-house insurance companies may benefit by less competition.