What is force-placed insurance?

Force-placed insurance is a type of insurance policy placed on your car or home by the auto or mortgage lender when you let your own coverage lapse or when the lender deems your coverage to be inadequate.

Below, we’ll walk through what force-placed insurance is and how it works, what it does and doesn’t cover, and how to remove it.

What is force-placed insurance?

Forced-placed insurance is a type of insurance policy purchased by your home or auto lender on your behalf. Also called lender-placed insurance or creditor-placed insurance, this policy only protects the lender’s financial stake in your property (namely, your car or home). It does not extend protections to you.

And even though your lender purchases the policy, it is “forced” upon you, meaning you’ll still have to pay for it. A force-placed insurance policy is less adequate, yet more expensive, than a policy you could purchase yourself.

How does force-placed insurance work?

When you have a car loan or mortgage, the lender requires you to carry certain levels and types of insurance. If the lender discovers you’ve let your coverage lapse or you’re not carrying enough insurance, they will purchase a force-placed insurance policy for you. Lenders may also purchase force-placed insurance policies if you haven’t provided proof of insurance, even if you have adequate coverage.

Lender-placed insurance policies typically cover damage to the vehicle or home, but they won’t always protect you. For instance, a force-placed home insurance policy is unlikely to cover your belongings in the event of a covered loss, such as a house fire. A force-placed car insurance policy may only include coverage for damage to your vehicle (i.e., collision and comprehensive coverage), meaning you could be breaking the law. That’s because almost all states require a minimum level of bodily injury liability and property damage liability to drive legally.

Do I have to pay for force-placed insurance?

If your lender is forced to take out a policy on your behalf because you don’t have appropriate coverage, you are responsible for paying for it.

• For a car loan, the lender typically adds the insurance premium to your monthly car payment.

• For a home loan, the lender typically pays for the insurance out of your escrow account, which gets funded by your monthly mortgage payment.

Note: Lender-placed insurance policies don’t happen overnight. Federal law requires a lender to send a notice 45 days before purchasing coverage and then a second notice at least 15 days before purchasing coverage.

What does forced-placed insurance cover?

Force-placed insurance coverage is designed to benefit the lender, not you. Here’s what is likely covered for both autos and homes.

Force-placed insurance for cars

If your auto loan lender purchases force-placed insurance for your vehicle, it will typically be a collision and comprehensive coverage policy. This would help pay for damage to your vehicle in the event of a collision, theft, vandalism, or other incidents, regardless of fault. 

Force-placed insurance for homes

For homes, mortgage lenders typically purchase enough hazard insurance to recoup their money if the house is destroyed. 

What does forced-placed insurance not cover?

Force-placed insurance is all about protecting a lender’s investment if you fail to do so. That means these policies are focused on covering damage to the property itself. 

Coverage gaps in force-placed car insurance

Importantly, if you only have force-placed car insurance, you could be driving illegally. 

Property damage liability and bodily injury liability are required by law in almost every state. These coverages help pay for damages and injuries that other people experience if you are at fault in an accident. Since lenders are only focused on protecting their own investment in your car, the force-placed policy they buy for you typically does not include state-required liability coverage. 

Instead, lenders might only purchase collision and comprehensive coverage on your behalf. These coverage types protect against damage to your vehicle — the lender’s primary interest — regardless of fault. 

So, with a force-placed policy, you could face a double penalty: you pay more than you should for the coverage, and you risk serious financial and legal consequences if you cause an accident or are pulled over without liability coverage.

Coverage gaps in force-placed home insurance

Force-placed home insurance is similar in that it primarily protects the lender. These policies typically exclude coverage that would be included in a standard home insurance policy, such as:

• Personal property coverage: The most common type of home insurance policy, an HO-3, includes coverage for your belongings like clothes and furniture in the event of a covered event, such as a fire or theft. Force-placed policies usually only cover the dwelling (structure of the home).

• Additional living expenses coverage: If a covered incident leaves your home damaged and unlivable, HO-3 insurance would help pay for hotel stays, dining out, and more while your home is repaired. Force-placed insurance likely won’t.

• Personal liability coverage: If you or a household member is responsible for someone else’s injuries or property damage — and if you’re sued as a result — HO-3 insurance would cover qualifying losses, up to your policy limits. Force-placed insurance doesn’t typically include liability coverage.

Why force-placed insurance costs more

Force-placed insurance policies cost more than a policy you could purchase yourself, even though they offer less coverage. This is often because the insurer must issue a policy without the typical criteria it uses to price a policy. The policy might also come with commissions or service fees, which are passed on to the force-placed policy recipient.

Similarly, when trying to save money, you might shop around with multiple insurers and compare quotes to get the best rates on your home and auto insurance, but a lender won’t do that. Instead, each lender likely has a standard insurer they work with for force-placed policies; lenders aren’t concerned with getting you the best deal.

How to remove force-placed insurance

A lender only purchases force-placed insurance if you’ve let your coverage lapse or have inadequate coverage. Fortunately, that makes removing such lender-placed insurance simple. Here’s what to do:

1. Contact your lender. If you’re not sure why the lender has purchased a force-placed policy, call your financial institution to find out. It’s typically either because you don’t have insurance, or you don’t have enough insurance.

2. Get the right insurance. If your lender purchased a force-placed insurance policy because you let your coverage lapse, purchase a policy on your own as fast as possible. If the lender-placed policy is a result of inadequate coverage, simply work with your insurer to increase your coverage limits.

3. Provide proof of insurance. Once you have the proper car or auto insurance, and at adequate levels, provide proof of insurance to the lender and ask to have the force-placed insurance policy removed.

4. Inquire about refunds. It may be possible to get a partial refund for the force-placed policy if you resolve the issue quickly. While not a guarantee, it’s worth asking your lender.

Note: If you believe your lender has purchased a force-placed insurance policy in error, contact them as soon as possible. There are federal protections in place that require the lender to cancel the policy, and you won’t be charged.

How to avoid force-placed insurance

To make sure your lender doesn’t issue a force-placed insurance policy, review their requirements for your home or auto insurance. If you discover your insurance is inadequate, increase your coverage limits until it complies with the lender’s guidelines.

Keep your insurance policy in good standing by paying on time, and always make sure your lender has an up-to-date copy of your policy.