When closing on your home, you signed loan documents agreeing to specific mortgage terms. One of those documents likely included an agreement to maintain continuous homeowners insurance coverage. If your insurance lapses or gets canceled, your lender may step in and obtain lender-placed insurance (LPI) — also known as forced-placed insurance — to safeguard the property.
Let's dive deeper into LPI's role, how it works, and how you can potentially avoid it.
Understanding Lender-Placed Insurance
Several factors are causing insurance carriers to suspend new policies or not renew existing ones in areas they have deemed “high-risk.” Rising disaster losses, construction costs, reinsurance rates and restrictive state regulatory environments are to blame in areas like Florida, Louisiana, and California. This trend is leaving some homes unprotected.
Borrowers with lapsed or canceled homeowners policies or with policies deemed insufficient will be subject to a lender-placed insurance plan. It’s a policy paid for by the borrower.
What Is Lender-Placed Insurance?
A lender-placed insurance policy is a policy that’s added to your mortgage if there’s a lapse in insurance coverage safeguarding your home. The lender is placing a policy to ensure the property remains protected. This limited insurance typically comes with a higher cost and provides less coverage than a policy you can obtain on your own. For example, it does not protect against losses to personal property.
When and Why Is LPI Implemented?
Lenders utilize LPI to bridge any insurance gaps and uphold the continuous coverage required by your home loan agreement. This coverage ensures that the property remains protected, safeguarding the lender's financial stake in it. The cost of LPI is debited from the escrow account and collected in the monthly mortgage payment.
Key Players Involved
Mortgage companies, insurance providers and borrowers all play distinct roles in the lender-placed insurance process.
Lenders
- Uphold the homeowner’s requirement to maintain homeowners insurance
- Initiate LPI to protect the home and their financial investment in the property
- Charge and collect premiums, which are added to the homeowner's escrow account, resulting in an increased mortgage payment amount
Insurance Providers
- Provide LPI coverage at the request of a lender
- Manage LPI policies, including collecting premiums from the lender, processing claims and maintaining coverage
- Ensure compliance with applicable laws and regulations
Borrowers
- Are responsible for maintaining adequate homeowners insurance coverage to protect their property and comply with the mortgage agreement
- Should communicate with the lender to ensure the lender has the most up to date insurance information
- Seek assistance from an insurance company, agent, or broker if they are facing challenges securing insurance
How Lender Placed Insurance Works
Borrowers need to understand the importance of fulfilling their obligation to maintain homeowners insurance. Here's an overview of the steps involved when a borrower does not maintain the required property coverage:
- Lenders regularly monitor a borrower’s insurance coverage. Upon discovering a lapse or inadequacy in the homeowner's insurance, they will initiate the process of obtaining LPI. A lender typically will first notify the homeowner before purchasing LPI, and then will send a Certificate of Coverage to inform the homeowner once LPI is in place.
- The LPI premiums are added to the homeowner's mortgage balance, increasing the monthly mortgage payments. These premiums are often much higher than those of standard homeowners insurance.
- Lenders will maintain LPI coverage until the homeowner secures adequate homeowners insurance.
- Once the homeowner obtains satisfactory homeowners insurance, the lender discontinues LPI coverage and the associated charges from the escrow account.
Triggers for LPI Placement
Lenders initiate lender-placed insurance when there is a lapse in the required insurance coverage on a property that serves as collateral for a loan. Common situations that trigger this include:
1. Expired or Canceled Homeowners Insurance
If the existing insurance policy on the property lapses or is canceled, leaving the property uninsured, the lender may initiate LPI.
Why would a policy be canceled? Insurers may drop homeowners insurance for a variety of reasons. Often, underwriting standards change, and insurers decide not to cover properties in certain areas. Policies can also be canceled due to non-payment of premiums, frequent or fraudulent claims, or changes in property usage, such as turning a home into a rental property.
2. Incorrect Mortgagee Listed
LPI also may be triggered when the insurance company does not have the lender listed as the mortgagee. It is important to list the correct mortgagee so the insurance company can send automatic renewals directly to the lender.
3. Inadequate Coverage
A lender may impose LPI if a borrower does not obtain or maintain the insurance coverage required by the loan agreement. A great example of this is wind coverage. If a homeowner’s policy excludes wind, it may be deemed insufficient, requiring them to obtain a separate policy or additional coverage.
The Role of Lender-Placed Insurance
The primary role of lender-placed insurance is to protect the home and the lender's investment in the property by ensuring it’s adequately insured against potential losses due to damage or destruction. It’s a backup measure if the homeowner does not maintain their homeowners insurance policy.
Cost and Coverage
There are significant differences between standard homeowners insurance and LPI in terms of coverage, costs and flexibility.
Comparison with Standard Homeowners Insurance
- Coverage Limits and Scope: LPI provides limited coverage, often only covering the dwelling or sometimes only up to the mortgage balance. Standard homeowners insurance usually offers broad coverage, including liability, personal property and additional living expenses.
- Premiums. LPI is often more expensive than insurance obtained directly by the borrower. That’s because homeowners have the flexibility to choose their own insurer and policy with regular homeowners insurance. Whereas lenders do not have the same ability to negotiate lower premiums for lender-placed insurance, as they are not the policyholders.
- Flexibility: Standard insurance is chosen by the borrower, so the homeowner has more flexibility in deciding which provider and policy to select. With LPI, the lender has to select the insurer and policy, which may not be the best fit for each borrower.
Risks and Controversies
LPI is not uncommon but it does come with drawbacks, so reputable lenders make efforts to help homeowners avoid it. Some reasons to avoid LPI include:
- Higher costs, which can place a financial burden on homeowners
- Less comprehensive coverage than standard insurance, which leaves homeowners insurance with less protection in case of a loss
- Lack of control since the lender chooses the LPI policy and terms
It’s important to note that LPI is considered a protective, backup measure. Lenders typically prefer that homeowners maintain their own insurance policies.
Alternatives to Lender Placed Insurance
It’s always in your best interest to maintain your own insurance policy, as it’s more affordable and provides more coverage. However, when necessary, LPI serves to fill gaps in coverage to keep the home protected. Let’s look at some strategies for potentially avoiding lender-placed insurance.
Maintain Homeowners Insurance or Replace as Soon as Possible
Homeowners should maintain their standard homeowners insurance policy. If your insurance lapses or is canceled, replace the required insurance on your property as soon as possible and send proof of insurance to us. Pennymac will update your insurance information within 3-5 business days from the time we receive the request and insurance confirmation. Once completed, the new insurance information will be displayed in the Escrow section of your online account.
Exploring Other Insurance Options
If you're denied coverage due to being in a "high-risk" area, talk to your neighbors about what insurance companies they use. If you're moving into a new home, your lender or real estate agent may suggest options. If you still need help securing insurance, find out if you live in a state that offers FAIR (Fair Access to Insurance Requirements) plans.
FAIR plans are government-mandated property insurance plans that provide coverage to individuals and businesses who can’t obtain insurance in the regular market. These plans typically include basic coverage for properties considered high-risk or difficult to insure due to factors such as location, age or type of construction.
If you’re turned down or non-renewed by your current insurance company or are otherwise in need of coverage, you may apply for coverage under the FAIR Plan through an agent or broker licensed to sell FAIR property insurance. You may want to contact your insurance agent/company to understand exactly what is and isn’t covered under the FAIR plan.
Keep in mind, though, that while FAIR plan insurance policies can be a lifeline for those with no other options, they may be costly and may offer limited coverage. It’s optimal to try to maintain your own homeowners insurance policy to adequately protect your interests and assets. If you have to carry a FAIR plan, talk to your insurance agent/company about obtaining supplemental coverage that may not be covered under the FAIR plan.
Communication and Transparency
Communication and transparency are essential for both the borrower and the lender. You should notify the insurance company promptly if you encounter difficulties maintaining mandatory insurance. Prompt and proactive communication can give you time to explore options that may help you avoid LPI.
Your lender also will be committed to ensuring you are promptly notified and receive information that is helpful regarding costs and coverage, and they should be available to help if you have concerns.
Take Steps to Avoid Lender-Placed Insurance
At Pennymac, our goal is to help you take action to avoid lender-placed insurance. If you’re facing a possible lapse of sufficient homeowners insurance coverage, visit mycoverageinfo.com/pennymac for information that can potentially help you avoid the extra expense and reduced coverage of LPI.
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