Insurance Commissioner Dave Jones Calls on "Forced-Placed" Mortgage Insurers to Reduce Rates
News: 2012 Press Release
Insurance Commissioner Dave Jones contacted the 10 largest "lender-placed coverage" insurers in California to express concerns about excessive rates and directed that they make a rate filing with the California Department of Insurance (CDI) to reduce their rates. This action comes amid reports of questionable financial integration between mortgage lenders and insurers providing "forced-placed" mortgage insurance. Commissioner Jones directed CDI to examine the insurers' annual financial statement data, and CDI found their loss ratios to be low-an indication that rates may be excessive. Insurers were directed to provide a response to CDI by April 1, 2012. The decision of the Commissioner is particularly noteworthy in light of the growing number of California homeowners facing economic distress with mortgages "underwater" whose lenders are "force-placing" insurance.
A New York Times investigative series exposed the financial relationships between lenders and the forced-placed insurers, including lenders owning an interest in the insurers. Because the homeowner pays the cost of the insurance, lenders with a financial relationship with the insurer have no incentive to keep the cost down for the homeowner. Indeed, they have an economic incentive to force-place more expensive insurance. Homeowners complained that they pay more for forced-placed insurance than they would if they obtained the insurance themselves.
"Homeowners have complained that they are forced to pay for homeowners' insurance purchased for them by their mortgage lender at a price higher than insurance they could obtain themselves-yet another facet of lender practices associated with the mortgage crisis," said Commissioner Jones. "Recent investigative reports detail the lack of arm's length transactions between lenders and insurers and, in some cases, a financial relationship between lender and insurer, which means the insurer is able to charge a higher price than would otherwise be the case. Our review of the forced-placed insurers' loss ratios-the percentage of every premium dollar an insurer spends on claims-found that the loss ratios are low, which typically points to excessive premiums and is evidence to support complaints about the absence of arm's length transactions between lenders and forced-placed insurers. I sent our findings to the top 10 forced-placed insurers and directed that they submit new rate filings with lower rates."
What is forced-placed or lender-placed coverage?
When an individual obtains a loan in order to purchase a property, the mortgage requires the borrower carry insurance for that property. In other words, the property is collateral for the loan and the lender wants that collateral's value protected by insurance. Typically, the borrower's insurance policy is endorsed to name the lender. If at any time the insurance coverage is canceled or non-renewed, the lender may, in accordance with the mortgage provisions, purchase insurance on the property on behalf of the borrower (to protect the lender's interest in the property) and is allowed by contract to charge the borrower for the cost of that insurance. This is called lender-placed or, commonly, force-placed insurance. The lender-placed coverage typically includes only the perils of fire and allied lines which means that the coverage is much more limited than homeowners coverage as it does not include personal property, liability or additional living expense coverage, as examples.
Consumers typically contact CDI after a lender has already placed such a policy, so the consumer is already being assessed a premium. In one particular case, CDI assisted a homeowner who was refinancing his home and learned that his lender had forced-placed a policy for the previous full year's term, though the homeowner already had a policy in place. The premium for the annual term was $4,946, and due to the time at which the erroneous charge was detected, a renewal policy was already in place for an additional $4,946. However, once CDI questioned the insurer providing the forced placement carrier regarding the legitimacy of its action, the carrier issued a refund of the entire $4,946 for the previous term as well as a refund of the partial year that was also assessed. This led to a combined recovery of $9,892 for the homeowner.
Consumers are encouraged to call 1-800-927-HELP for more information or if they believe a forced-placed policy has been wrongly placed on their mortgage.
The California Department of Insurance, established in 1868, is the largest consumer protection agency in California, regulating the $123 billion insurance marketplace. In 2013 the California Department of Insurance received more than 170,000 calls from consumers and helped recover over $63 million in claims and premiums. Please visit the Department of Insurance web site at www.insurance.ca.gov. Non-media inquiries should be directed to the Consumer Hotline at 800.927.HELP or 213.897.8921. Telecommunications Devices for the Deaf (TDD), please dial 800.482.4833.