What is force-placed insurance?

kate_sept2004/Getty Images

Force-placed insurance — which some may refer to as “forced placed insurance” — is a type of hazard insurance taken out by the lender if a driver fails to meet the insurance requirement for a lease or loan agreement. Most often used on auto and home loans, force-placed insurance is often more expensive than standard auto and home insurance with fewer protections for the borrower. By meeting or exceeding the minimum insurance requirements throughout the loan or lease agreement, you can help avoid force-placed insurance.

What is force-placed insurance?

So what is force-placed insurance and when is it required? It essentially operates how it sounds, as forced insurance. When a lender agrees to finance your car or home purchase, the vehicle or home is their investment until you pay off the loan. If you fail to meet the insurance obligations set out in the finance agreement, the lender may buy force-placed insurance (also known as collateral protection insurance or lender-placed insurance) to protect their investment. The cost of the insurance passes off to you, which usually ads to your total loan payment.

While it is often more expensive, force-placed insurance rarely offers protection for the borrower. The lender chooses the insurance company, which likely will not take your budget into consideration. Additionally, the force-placed insurance policy usually covers what the lender requires to protect their investment, leaving your personal property and liability exposed. Each state may specify additional requirements surrounding how force-placed insurance policies should work.

For example, with New Jersey legislation force-placed insurance, auto lenders must send a notice to the borrower within 30 days of the start of the loan agreement disclosing the carrier and the added cost to the total loan amount. Lenders must also disclose that the insurance may be dropped if the driver purchases their own coverage.

When force-placed insurance may be issued

When you finance a car or home, your policy includes the lender as an insured interest. They will receive renewal notices and notifications if the policy cancels or lapses. Force-placed insurance may be required if:

  • Your insurance policy ends and you do not renew or replace it.
  • Your insurance lapses because you miss a payment.
  • The lender does not receive proof of insurance.
  • You do not have the minimum required insurance coverages in place.
  • You switched insurance carriers but did not notify the lender.

What is force-placed car insurance?

You may be wondering, “If the borrower is not protected, what does force-placed insurance cover?” When you purchase a car, you must meet the minimum liability or financial responsibility insurance requirements before you can drive it off the lot. When you finance or lease the car, the lender often has specific insurance requirements to protect their investment.

While lender requirements vary by car lender, most require higher liability limits than states require. Loan agreements often require full coverage, which includes both comprehensive and collision coverage. There may be a maximum deductible you can have for each coverage, usually $500 or $1,000.

Other force-placed insurance policy types

When you are required to have insurance coverage by a lender, there is a chance you could end up with force-placed insurance if you do not maintain home or auto insurance. If you buy a home that requires flood insurance and you do not meet the requirements, you could get force-placed flood insurance as well.

  • Force-placed homeowners insurance: The lender is concerned with replacing the home structure if it is damaged or deemed a total loss. Force-placed insurance may only cover the dwelling, leaving you without personal property, liability, loss of use and other key coverages. If a covered peril occurs, like from fire, you could take a loss on your damaged belongings if you do not have standard home insurance in place.
  • Force-placed flood insurance: Lenders who require flood insurance as part of the mortgage terms may purchase force-place flood insurance if you do not meet the standard flood insurance terms. The lender could purchase a National Flood Insurance Program (NFIP) insurance policy, which may cause your premium to differ much. However, the lender could also buy private flood insurance, which could be more expensive, even if there is no contents coverage for your personal belongings.

Is force-placed insurance expensive?

Compared to a standard auto insurance policy, force-placed insurance is generally more expensive because insurance companies do not typically use the same criteria for finding a company as individuals might. Because the lender selects the coverage and limits, the policy likely won’t reflect your home’s needs or personal ones. Similarly, because premiums are passed onto you, the cost of the policy will not be a lender’s concern as long as their investment is protected.

How to get rid of force-placed insurance

With a higher cost than a standard insurance policy, getting rid of force-placed insurance could lower your monthly or annual auto insurance payment. If you get a notice that you have force-placed insurance, you should contact an insurance company and lender to see which requirements you are missing and what your options are to rectify the situation.

If your insurance policy does not meet the loan requirements, lapses or cancels, the lender may force place insurance on your car. This could also happen if the lender does not get proof of insurance with the minimum requirements in place. Sometimes, the notice may be the result of an error that can be corrected by the lender or insurance company, like an incorrect address for the lender to send the proof of insurance to.

If you have force-placed insurance and want to get rid of it, some general steps to take are:

  1. Contact your insurance company to reinstate your insurance policy or issue a new insurance policy.
  2. Provide documentation showing sufficient coverage on your auto insurance policy.
  3. Make changes to your insurance policy to meet or exceed the lender requirements.

Regardless of the reason for force-placed insurance, policyholders should pay the premium until they can purchase an individual insurance policy. Failure to pay could result in the loan being due in full for the remaining balance or a lender suit. If you are able to provide proof of regular insurance that meets the lender requirements, you can typically get a refund of the unused premiums.