The economic climate of today is tumultuous and unpredictable at best. It seems everywhere you look, people are losing their jobs, homes and sometimes much more—talk about a bleak landscape. All of this loss and uncertainty has led to a rise in force-placed insurance policies, as individuals struggle to stay on top of their normal home, or auto insurance payments.
At its core, force-placed insurance is a tool used by lenders when their customers fail to pay them what they owe. Basically, a lender takes out a policy, and then passes the expenses onto the individual home or car owner, should they fall behind on their own payments to the lender. Think of it as insurance for the insurer.
Provided by high-risk insurance companies, typical lenders don’t offer these because of the high risk and chance of loss associated with them. All-too-often, policyholders fail to pay or things fall through, leaving the insurer in the lurch and on the hook for the lost money. Forced-placed insurance policies help prevent that.
Being such a high-risk, these policies are often much more expensive than the average, run-of-the-mill one you might purchase yourself. Plus, when a lender gets one, they are not concerned with how the charges will affect your financial situation, that’s not their responsibility. Their priority was to protect the collateral that got you into this situation in the first place.
However, issues with this system arise when mortgage holders take it upon themselves to invest in policies you might not need—such as flood or wind protection—without consulting you — and leaving you with the bill. This, in turn, sometimes creates issues where the unwanted loan is so expensive it puts the borrower behind on their initial loan, putting them at risk for falling victim to the high rates and premiums that come with the forced-placed policy. Almost makes it sound like a big scam, huh?
Well, the New York Times seemed to think so. They covered this story in early 2012 and in it they mention how banks and insurance companies could potentially be working together providing each other kickbacks and cuts from the deals.
Big names like JPMorgan Chase, Bank of America®, Citigroup and Wells Fargo were all under investigation and it’s likely this is just the beginning. The article does not condemn the use or purpose of force-placed insurance policies, but rather attacks those professionals and executives that are taking advantage of the poor economic situation to make a quick buck.
What’s more is that this whole vicious cycle, is also part of the reason the outlook hasn’t exactly improved. Homeowners that have fallen victim to wrongly imposed force-placed policies are now finding it more difficult to refinance loans, and a great deal of the population has their hands tied. They are stuck dealing with financial burdens they didn’t ask for, and until they pay them off there’s absolutely nothing they can do to move forward—leaving the housing market where it is.
Another piece by Bloomberg Businessweek took a look at total national premiums for force-placed policies and analyzed the sharp increase they’ve experienced over the last few years. It too recognizes that the present economy was to blame.
Overall, homeowners (and in some instances even car owners) today, have more to worry about than the typical insurance woes of the past. Gone are the days when the biggest issue you had was finding a decent rate. Now, you have to be on the defensive to ensure no one slips one past you. Until something is done to stop the underhanded conspiring that’s taking place between the banks and the insurance companies, the general public will continue to suffer. So, until then, keep your eyes peeled, know your rights and ask questions. Now, more than ever, it’s important that you be fully aware of your financial situation at all times.