Forced-Placed/Foreclosed Property Insurance

Once it has been discovered that a mortgaged property is not insured by the mortgagee, coverage must be “placed” in force by the bank.

Most bank mortgage errors and omissions policies allow ninety days to place alternate coverage from the time it is discovered that an insurance policy has lapsed. Forced-placed policies are one way to insure a customer’s property when the customer fails to obtain insurance. The amount of coverage is usually the amount of the outstanding loan. Banks can (in most states) charge the premium back to the customer’s account, though proposed regulation is threatening this practice.

Most forced-placed policies are on a reporting form. The insurance company charges a minimum deposit premium ($500 for a small- to medium-sized bank is not unusual), and reports of the property to be covered are made each month to the insurance company. The deposit is used up as the reports of property covered accumulate. Insurers then bill an additional premium to the bank.

Be aware of the perils that are insured, and the penalties for missed reports. Also, coverage for foreclosed properties can usually be added to most policies at a different (more costly) premium rate.

Some smaller banks are able to place the property insurance through a local agent. This tends to involve more administrative work on the bank’s part, as each property will be individually underwritten by an insurer. There also may be restrictions to coverage for loss by vandalism when a property is vacant and covered by a standard policy.

A great number of forced-placed property insurance includes a provision that provides automatic coverage when a customer is found to have no insurance. This can almost act as retroactive insurance — being put in force after a loss has occurred. This coverage feature is usually a part of policies where the agent managing the forced-placed policy has taken over the insurance tracking work for the bank.

Because of the cost of insurance tracking and the administrative issues put on banks by regulation, more banks are considering “blanket mortgage hazard” insurance that eliminates all tracking and forced-placing of insurance. Banks buy a policy that covers the actual loss of a mortgaged property when the borrower’s insurance fails to respond. With this policy, nobody tracks insurance or force-places insurance. Obviously, this policy is not inexpensive. Some banks, however, are finding it a valid approach.