Mortgage lenders are entitled to require that you insure the home or other real estate that you gave them as collateral when you signed the mortgage. For most people, they buy this insurance themselves, or pay the premiums as part of the "escrow" that the lender collects with the mortgage payment.
Rightly or wrongly, the lender may purchase "force placed" insurance. When this happens, you pay a lot more for a lot less. And as a recent New York Times article explains, if the lender did not and should not have bought this policy for you, prompt, well-documented and aggressive action is essential, but even that may not be enough. NY Times, 3-26-11 "Insurance Dictated by the Bank".
Why does this happen? The borrower may have fallen behind on mortgage payments, and the lender, not having gotten payment for insurance premiums, lets the existing relatively cheap homeowners insurance policy lapse, then buys its own policy. Or the borrower may have moved out of the property, and the insurer cancels the homeowner's policy due to enhanced risk. Or the lender may have no right to buy insurance because insurance is in place and paid for.
If you are the homeowner, you should have received notice of any insurance cancellation. If so, you need to act quickly to stop the cancellation. Even if the home is in foreclosure, you as the owner need to have insurance in place until sheriff's sale or until you no longer own the property. You need this to protect you against possible future claims and suits. You need this insurance even if you have filed for bankruptcy. If for example, your home is vacant and burns down after your bankruptcy is filed, damaging your neighbors home, they will have a claim against you and you can expect to defend a lawsuit. Because such post-petition claims are not discharged in bankruptcy, you will have no protection, and will have to pay your own legal fees to defend yourself, not to mention any judgment or verdict against you.
So before your insurance is canceled, consider paying the premium yourself if you are not paying the mortgage payments. If the lender has received payment for such insurance, they are supposed to pay the premium for you. After all you paid for it.
What if the insurance has not been canceled but the lender says you have no insurance and will buy its own policy? You need to act promptly. You need to protest in writing with proof that insurance is in place. And you need to document, by a certified mail receipt or otherwise, that the lender got your notice. And you need to keep all these records.
If you find that your insurance was canceled without notice to you, the cancellation may not be valid, You will need to protest in writing to the lender and your insurance agent, demanding proof of service and reinstatement. You also need legal advice.
If the lender goes ahead and without just cause buys its own policy, you need to keep protesting, because the lender is going to add the additional cost to what you owe on your mortgage. And at that point, you need to seek legal advice. We have been able to get the costs of the wrongfully placed and unnecessary insurance removed from the arrearage or balance the lender claims as due.
Even if you have moved out or expect to be moving out of the property, and will never have to pay the money owed to the lender, you must still be concerned. The policy the lender buys will provide no coverage for you. All it insures is the value of the real estate with any payout only to the lender. Any equity in the property remains uninsured. If your furniture or property is lost, stolen or damaged, you will have no insurance. If someone is injured on the property or it causes damage to their property, (or even if they make a groundless claim against you), you will be uninsured, and you will have to pay for your legal defense out of your own pocket.
As the author of the article cited above shows, getting the lender to back off when they falsely claim insurance is needed is not always simple or easy. But action is essential.
