If you own a home, you may be familiar with force-placed homeowners insurance. Basically, in order to protect their interests, your mortgage lender usually has the right to force you to purchase homeowners insurance. That way, if there is a serious loss of property — say the house burns to the ground — the lender does not have to absorb the loss. The insurance company assumes the risk. As a homeowner borrowing money to purchase a home, you are not permitted by your lender to assume the risk yourself — in most cases you are forced to purchase homeowners insurance that meets certain requirements. You’re allowed to purchase insurance on the open market and rates are fairly reasonable — unless you let your policy lapse for some reason. Then the mortgage lender has the right to force-place homeowners insurance on you, and the policy they choose may be a lot more expensive than the policy you chose for yourself. You consented to the possibility of a force-placed policy when you (probably mindlessly) signed the two-inch pile of papers at closing.
This actually happened to our family when we purchased our home. We had shopped around for the best price and best policy to fit our family’s needs and, as we did with our previous home, we planned to pay for it out of an escrow account, so it was combined with our mortgage payment. Somehow, there was a paperwork mix-up and the mortgage company never paid the premium, resulting in cancellation of the policy. A few months after we moved in, we suddenly found that we had been force-placed into a high-cost homeowners insurance policy chosen for us by our mortgage company. It was three times the cost of the policy we had chosen, but because our policy had lapsed, the lender had the right to force-place us into another plan. Eventually, we were able to drop that policy and get back to the one we wanted, but it was not an easy process.