What Is A Lender Placed Policy?
By Kyle Hyman, Esq.
If you are a homeowner, it’s always good to familiarize yourself with the obligations of your mortgage agreement. One common obligation is the requirement that property owners maintain a certain amount of homeowner’s insurance for their residence. Lenders usually insist that their borrowers keep insurance on the property to ensure that, in the event of a loss, there are sufficient funds to repair damaged property.
If a homeowner fails to keep adequate insurance, the mortgage company will usually purchase it for them. These types of insurance policies are often referred to as a creditor or lender placed policy.
The Downsides of a Lender Placed Policy
While some homeowners may not give a second thought to their mortgage company purchasing insurance for them because it’s one less thing on their plate, there are significant downsides to having a lender placed policy insuring your home.
Cost
First, lender placed policies can be expensive. Unlike consumers who will shop around and compare prices when purchasing insurance, banks usually go to a select few insurance carriers who provide lender placed policies. Since the market is pretty much set and it’s the borrower who ultimately has to pay the premium any way, banks aren’t too concerned about the price of a lender placed policy.
What’s that mean for the homeowner? That a lender placed policy could end up costing you far more than a traditional policy in the long run. For those who want to keep premiums low, you will do much better shopping for insurance yourself.
Coverage
Another reason to steer clear of lender placed policies is because of the limited amount of coverage they afford. Coverages provided by a lender placed policy are usually the bare minimum.
Remember, the bank is only worried about making sure the home itself is protected. This means that other important insurance coverages found in traditional policies, like coverage for personal property, additional living expenses, or personal liability, are kept to a bare minimum and sometimes are not covered at all.
When it comes to insurance, you want to protect yourself from the unexpected. Lender placed policies will usually fail miserably in this regard and could leave you stuck with a hefty bill in the event of a loss.
Your Rights
Finally, in addition to less coverage and higher premiums, lender placed policies also can leave homeowners with far fewer rights than they would otherwise have under a traditional insurance policy. Since your bank is the one purchasing the insurance, many times they are exclusively the named insured under the policy.
This means that the bank, not you, holds the keys to many of the rights and benefits enjoyed by a homeowner in a typical insurance policy, including the right to direct payment in the event of a loss. Not being a named insured on your policy can also adversely affect a homeowner’s right to assign the post-loss benefits to a contractor in exchange for much needed repairs.
This could significantly hinder your ability to get your home fixed or add unnecessary hurdles to reimbursement once repairs have been completed.
Lender placed insurance policies should be the policy of last resort for homeowners.
Taking the time to shop around and purchase insurance for you will save you money and keep you better protected. Most importantly, it will keep you in control of the claim and benefits in the event of a loss.
If you have any questions, give us a call today – we’re always happy to offer any guidance we can.
Kyle Hyman, Esq.
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