Are there differences between a homeowner policy you would purchase from an insurance agent and a policy that you would get directly from your lender? Yes, there are. Coverage directly from the lender is also known as “force placed coverage”.
The purpose of a homeowner policy is to make YOU whole again in the case of a covered loss. For example, if there is a fire, your homeowner policy would pay to rebuild your home. The coverage amount you would have is the amount of the repairs up to the limit stated on your policy.
The purpose of force placed coverage is to protect the lender. To make the mortgage company whole if there is damage to your home.
There was an interesting situation last week. One of my clients asked me to review a contract that his friend had for a lender placed policy. The friend had a house fire and the home is going to be a total loss. I read through the contract, and this is what I found:
There are 3 payment options on this lender placed policy and the insurance carrier will only pay the lesser of these 3 amounts.
- The cost to repair the home.
- The dwelling limit on the policy.
- The balance of the loan / mortgage.
In this situation, the balance of the mortgage is the lesser amount. This means the insurance carrier will pay off the mortgage to the lender. The burnt home then becomes the property of the insurance carrier and the homeowner is left with nothing. There is also no coverage for their personal belongings that were lost in the fire.
It is important to remember that force placed coverage is specifically meant to protect the bank’s interest, not the homeowners. Other differences are that on a lender placed policy there is no coverage for your personal property (furniture, clothes, tools, electronics etc) or your personal liability.