Force-placed insurance is a common solution, but there’s a better approach.

To secure a loan, borrowers must have insurance to cover the property. If a borrower does not obtain insurance, lets their insurance lapse, or their coverage is terminated, the lender usually has the right to get insurance to cover the property. This insurance is called “force-placed insurance” and protects the lender, although the borrower will be required to pay for it.

Force-placed coverage not only carries a higher cost compared to standard policies but also is burdened with an abundance of documentation, time-intensive processes, and unnecessary intricacies.

Force-placed insurance is not the sole recourse available to lenders dealing with borrowers who aren’t in compliance with their loan’s insurance guidelines. In fact, it should be considered a final resort after exhausting all other mitigation approaches. Even so, in some cases, resorting to force-placed insurance may seem to be the only option, albeit one that is marked by cumbersome expense and is time-intensive.

The discourse surrounding force-placed coverage is contentious. Critics of force-placement posit that because the purchaser of the insurance (the lender) and the party responsible for its payment (the borrower) are distinct entities, the buyer lacks incentive to negotiate for a better premium price. Consequently, this misalignment results in a higher premium price than is necessary for the level of coverage. This discord frequently culminates in challenging dialogues between lenders and borrowers.

This issue has attracted substantial criticism, prompting state governments, most notably in Florida and Missouri, to take action in an effort to “enhance fairness” within the process. One such measure, House Bill 793, strives to establish a legal structure for lender-placed coverage in Florida. Likewise, recent revisions to insurance regulations in Missouri establish clear guidelines dictating the circumstances and methods for implementing force-placed coverage.

Does a viable solution exist that allows lenders to avoid resorting to force-place insurance altogether? Yes, the solution lies in technology. But before we can understand the benefits of that technology, let’s consider why borrowers become noncompliant with insurance requirements to begin with.

Reasons for Noncompliance?

Insurance experts have varying perspectives about the underlying reasons behind why borrower’s coverage becomes noncompliant. Most agree, however, that it’s attributed to poor administration surrounding the renewal of existing coverage or cost-related factors stemming from fluctuations in interest rates or overall escalations within the insurance market.

A subset of borrowers opts to prematurely terminate insurance policies to trim expenses. There are also borrowers who fail to secure coverage that adequately aligns with the lender’s pre-determined insurance requirements. The difference in time frames between insurance policies (typically spanning a year) and loan terms (which can extend up to 30 years) exacerbates the challenge of aligning lender prerequisites with insurance coverage. This is particularly relevant because a lender’s insurance requirements might undergo changes at any point during the loan tenure.

To summarize, borrowers generally become noncompliant for one or more of the following reasons:

1. Lapse in making annual premium payments
2. Policy becoming dormant or reaching its expiration
3. Termination of existing policies
4. Insufficient coverage due to insurers changing policy midterm
5. Challenges in securing underwriting for high-risk properties (i.e., those in disaster-prone areas or high-crime neighborhoods)
6. Inadequate coverage within present property insurance policies

The process of force-placing insurance creates extensive amounts of back-and-forth communication and paperwork between lenders and borrowers. It is estimated that as much as 10%-15% of all paperwork generated by insurance companies is for lender force-placement issues.

Although it is possible to charge borrowers for force-placed coverage, the cost of tracking each borrower’s insurance compliance status requires extensive resources, resulting in additional costs for lenders that can detrimentally impact existing lender-client relationships.

When Can Lenders Force-Place?

The Real Estate Settlement Procedures Act of 1974 sets out the process for when and how lenders can force-place coverage. Foremost, the loan servicer must establish that the borrower has failed to maintain compliant insurance coverage for the life of the loan.

Upon establishing that the borrower has failed to maintain proper insurance coverage, the lender must send a notice indicating that if coverage remains noncompliant after 45 days, the lender will force-place their insurance. This notice must contain the:

1. Notice date.
2. Servicer’s and borrower’s names and addresses.
3. Property identification by physical address.
4. Request for hazard insurance information.
5. Notification of expiring, expired, or insufficient hazard insurance.
6. Servicer’s inability to verify coverage.
7. Indication of necessary hazard insurance.
8. Intention of servicer-initiated insurance purchase.
9. Call for prompt submission of information.
10. Description of required information and submission methods.
11. Note about cost and coverage differences compared to borrower-purchased insurance.
12. Servicer’s contact number.

If relevant, it should also include advice to review additional information within the same communication.

The reminder notices must be delivered or mailed at least 15 days before imposing a premium charge or fee related to force-placed insurance.

The reminder notice must not be sent until 30 days after delivering the written notice. For cases where hazard insurance information is not received despite the initial notice, the reminder notice should include the date, a statement that it’s the final notice, necessary information, and the cost of force-placed insurance.

If you lack evidence of continuous coverage, the notice should contain the date, required information, a statement acknowledging receipt of provided insurance information, a request for missing information, and details about the borrower’s responsibility for the servicer-purchased insurance.

You are likely beginning to see why force place insurance can be laborious and expensive.

An Alternative?

Establishing a strong relationship with your borrowers that consists of clear communication, mutual trust, and personalized support is ultimately the best way to reduce borrower noncompliance. Here are some strategies you can integrate in your day-to-day operations:

• Verify at closing that the contact information for the broker and borrower is accurate.
• Upon loan approval, ensure that all approved policy and insurance documentation is stored.
• Prior to renewal, ensure that all policies are compliant with both federal requirements (if any) and your internal guidelines.

Guarantee accurate and timely reminders for tracking policy expirations, cancellations, and non-renewals, leaving no room for errors.

Communicate to your borrowers, in advance, about the substantial cost and excessive fees that come with force-placement.

Now, envision having to manually undertake all these activities using dedicated hourly-based teams, which would inevitably add an extra layer of administrative burden to your operations. Clearly, this approach is far from cost-effective.

The true solution to avoiding the hassle can be found in technology. Contemporary solutions available in the market have been purposefully designed to assist lenders in refining their process management. These platforms empower lenders to stay ahead of potential issues by streamlining document management, administrative tasks, and borrower communication, thereby enhancing overall efficiency.

Groundbreaking technology enables streamlined workflows for insurance status tracking, customization of follow-up cadence, and automation of compliance checklists. Existing systems that rely on manual intervention are more error-prone and generally more expensive than tech-enabled solutions.

If you are constantly dealing with borrowers being noncompliant, consider the benefits of seeking tech-enabled insurance compliance solutions. These solutions include sending automated follow-ups to brokers to resolve compliance issues, a non-compliance tracker that is triggered upon the receipt of various notice types, and compliance checklists tailored to your specific insurance requirements.