Homeowner Tactics and Remedies When Insurance Is Force-Placed

When a homeowner fails to purchase hazard insurance on their home, lets the coverage lapse, or purchases a policy not meeting the loan agreement’s minimum coverage standards, the mortgage holder typically has the right to purchase hazard insurance on the property and charge the homeowner for the insurance cost. This force-placement also can occur when the mortgage servicer mismanages the homeowner’s escrow account.  Force-placed insurance is almost always a bad deal for the homeowner and may be associated with several abuses. To make matters worse, the dramatic increase in climate-related disasters and the cost of insurance has led to a dramatic growth in force-placed insurance problems. 

This article begins with an exploration of force-placed insurance abuses, why homeowners should avoid force-placed insurance, and why force-placement has become far more common today. The article then surveys homeowners’ best options and RESPA rights and remedies to resist charges for force-placed insurance. 

Abuses Associated with Force-Placed Insurance

Force-placed insurance usually is more expensive than standard policies and offers homeowners less protection than standard policies. Force-placed insurance generally covers only the home and not the homeowner’s personal items, temporary relocation expenses, or potential liability. To make matters worse, the servicer has total control over the cost and selection of the force-placed insurance policy—the consumer has no say and is forced to pay for whatever insurance the servicer chooses. 

Servicers have an incentive to select a policy in the servicer’s best interest, not the homeowner’s best interest. For example, a servicer may choose an over-priced policy because that insurer offers financial incentives to the servicer, such as the insurer handling insurance monitoring of the servicer’s loans at a discount or no extra cost to the servicer. A servicer also might select a higher priced policy because it offers extra coverage or other services primarily benefiting the servicer.

Force-placed abuses can also relate to servicer errors, such as force-placing coverage where the homeowner has adequate coverage or where it was the servicer itself that failed to timely pay the borrower’s policy with escrow funds.  Other examples include where the servicer fails to notify the homeowner that insurance will soon be or has been force-placed. Similarly, when a homeowner provides the servicer proof of adequate coverage, the servicer may not cancel the force-placed coverage or provide the proper refund of force-placed charges in a timely manner, resulting in the homeowner paying for or being billed for duplicate coverage. 

Why Force-Placed Insurance Is Becoming Such a Large Problem

Increasingly, the cost of standard insurance is becoming unaffordable, which is a main cause of the growth of force-placed homeowner’s insurance. Insurance premiums rise as home values and construction costs increase, and also as insurers account for the increased severity of climate-change-related environmental hazards—storms, floods, tornadoes, and the like.  Insurance premiums are rising faster than inflation, particularly in certain parts of the country.

When insurance becomes unaffordable, many homeowners default on their insurance payments, choose to skip insuring the home, or opt for higher deductibles and less beneficial coverage that lowers their premium payments, even where such reduced coverage fails to meet the mortgage loan’s minimum insurance requirements. 

While homeowners are faced with an insurance affordability crisis, mortgage investors are asking servicers to be tougher in force-placing insurance when the homeowner’s coverage is not adequate. For example, effective June 1, 2024, a Fannie Mae bulletin and a Freddie Mac bulletin update their Servicing Guides to clarify that servicers must verify at least annually that the borrower’s insurer, policy amount, and type of coverage meet Fannie and Freddie standards.  The bulletins advise servicers to force-place insurance when the servicer discovers that coverage is being cancelled, non-renewed, reduced, or otherwise modified to no longer meet Fannie Mae and Freddie Mac requirements. While enforcement of these requirements has been suspended pending further review, servicers are still expected to comply at least until there are additional updates. 

These investor requirements specify that the homeowner’s insurance must be based on replacement cost and not “actual cash value”—actual cash value policies reduce coverage based on the cost to repair after deducting for the property’s depreciation, and thus are less expensive. Nor can deductibles exceed 5% of the insurance coverage amount—another way to reduce the homeowner’s insurance’s cost.  A policy offering $99,000 in coverage cannot have a $5,000 deductible. Where the deductible is excessive or the policy is based on actual cash value, the bulletins tell the servicer to force-place alternative insurance even if this leads to duplicative coverage.

Homeowner’s Best Tactics and RESPA Remedies

The remainder of this article sets out homeowners’ best options and Real Estate Procedures Act (RESPA) rights and remedies for dealing with servicers’ force-placed insurance practices.  A more complex consumer challenge—beyond the scope of this article—is a class action lawsuit challenging the servicer’s abusive selection of the insurance company and policy providing the force-placed coverage. Such challenges met with some success around 10 years ago concerning homeowners’ insurance and around 30 years ago concerning auto insurance. See NCLC’s Unfair and Deceptive Acts and Practices § 9.5.10.

Force-placed homeowners’ insurance is regulated by RESPA, 12 U.S.C. § 2605(k), (l), and (m), and Regulation X, 12 C.F.R. § 1024.37.  Relevant RESPA requirements—set out later in this article—apply to closed-end mortgage loans, including reverse mortgages. Also discussed below are RESPA requirements that compel a servicer to timely pay a borrower’s insurance policy with escrowed funds rather than force-place insurance, including paying flood insurance if escrowed. These requirements are also applicable also to home equity and other open-end mortgage loans. The RESPA force-placed requirements do not otherwise apply to flood insurance, though similar requirements are imposed by the Flood Disaster Protection Act. See NCLC’s Mortgage Servicing and Loan Modifications § 3.6.8. 

RESPA provides strong private remedies where servicers violate RESPA requirements. See 12 U.S.C. § 2605(f). The borrower may recover actual damages, costs, and reasonable attorney fees. Where there is a pattern or practice of noncompliance, additional statutory damages up to $2,000 are available. Class actions can recover actual damages plus statutory damages capped at the lesser of $1 million or 1% of the servicer’s net worth. See NCLC’s Mortgage Servicing and Loan Modifications §§ 3.12.1, 3.12.3, 3.12.4. The applicable statute of limitations is three years. Id. § 3.12.9. 

Importantly, there is no arbitration requirement or limit on class actions applicable to mortgage loan agreements. Federal law prohibits such limits on court actions and makes any such limits unenforceable. See NCLC’s Mortgage Servicing and Loan Modifications § 11.9.2. 

In any dispute concerning servicer force-placement of insurance, the homeowner’s first step is often sending the servicer a Notice of Error, as explained in detail at NCLC’s Mortgage Servicing and Loan Modifications § 3.3. RESPA requires the servicer to acknowledge receipt of the Notice of Error within 5 days, reasonably investigate the alleged error, and generally respond to the request within 30 days.  If the homeowner does not pay the disputed force-placed insurance charge during the investigation, the servicer cannot report the non-payment to a consumer reporting agency. Violations of RESPA’s Notice of Error provisions are independent RESPA violations leading to private remedies.

Where Servicer Erroneously Force-Places Insurance

Servicers may mistakenly force-place insurance even though the homeowner has adequate insurance in place. This would not be the first time a mortgage servicer was sloppy in its recordkeeping and handling of escrow accounts or its investigation of the homeowner’s insurance coverage.

The homeowner’s best option is to send a Notice of Error with proof of the homeowner’s own insurance, requesting the force-placed insurance be cancelled, with any charges related to the force-placed insurance removed from the account or fully refunded to the homeowner if paid. RESPA and Reg. X require any force-placed insurance charges or related fees paid by the borrower for overlapping insurance coverage, when both the force-placed insurance and borrower’s policies are in effect, to be refunded in full and removed from the borrower’s account. 12 U.S.C. § 2605(l)(3)(B); Reg. X § 1024.37(g)(2). 

Even though the servicer has 15 days to cancel coverage after it receives proof that the homeowner has had adequate coverage, it must fully refund to the homeowner all charges related to the force-placed insurance, from the first day the insurance was force-placed. 

Force-Placement When Homeowner Has an Escrow Account 

If the homeowner’s mortgage has an escrow account, the servicer must make timely payments from the escrow account to pay the homeowner’s insurance policy so that it does not lapse. 12 U.S.C. § 2605(g). RESPA requires the servicer to pay applicable insurance charges even when there are insufficient funds in the escrow account. This is required as long as the borrower is not more than 30 days in arrears or, even if in arrears over 30 days, as long as the borrower’s policy is not being cancelled for reasons other than non-payment.  Reg. X, 12 C.F.R. § 1024.17(k)(2), (5). See generally NCLC’s Mortgage Servicing and Loan Modifications §§ 3.5.6, 3.6.5. 

Because the servicer must keep the homeowner’s insurance policy paid up and in force, the force-placement of additional insurance is wrongful. The only exception would be if the homeowner’s policy, even if paid up and in force, fails to meet the loan agreement’s minimum requirements. Then the force-placement may not be wrongful, but still the failure to make payments on the homeowner’s policy would be a violation of RESPA’s escrow requirements.

Servicers wrongfully force-place insurance often as a result of their own error in allowing the homeowner’s insurance policy to lapse by failing to make timely escrow disbursements. This can have a devastating impact on homeowners by leaving them with limited coverage if there is a loss. Recently this has also meant that many homeowners have not been able to get replacement coverage where insurers have pulled out of markets affected by natural disasters or they have been forced to pay significantly higher rates than they had with their previous, lapsed policy. The homeowner’s actual damages can be substantial and are recoverable as injuries that directly flow from the servicer’s violation of 12 U.S.C. § 2605(g). The homeowner should also send a Notice of Error for the servicer’s errors in not complying with both the escrow account and force-placed insurance requirements. 

When Homeowner’s Coverage Fails to Meet Loan Agreement’s Requirements

A servicer can force-place coverage if the homeowner has a policy in place, but the policy does not comply with the loan agreement, such as having too high a deductible or based on actual cash value instead of replacement cost. To avoid duplicate coverage (having in place both the force-placed policy and the homeowner’s own policy whose coverage the servicer views as inadequate), the homeowner’s best option is to upgrade their existing policy to meet the requirements of the loan agreement and offer proof of that upgrade to the servicer, cancelling the force-placed policy.  Upgrading the homeowner’s own policy usually is the better option than cancelling that policy because force-placed insurance often is far more expensive and offers homeowners less protection. 

Force-Placement After Homeowner’s Policy Lapses 

When a homeowner’s policy lapses and the servicer force-places insurance, homeowners are almost always better off obtaining their own insurance which will require the servicer to cancel the force-placed coverage. To do so, the homeowner need only provide proof of coverage. The proof can be the homeowner’s policy declaration page or an insurance certificate showing the type of coverage and that the mortgage holder or servicer is listed as an additional loss payee.

Servicers must cancel force-placed insurance coverage within 15 days of receiving proof that the borrower has coverage that complies with the mortgage contract. 12 U.S.C. § 2605(l)(3)(A); Reg. X § 1024.37(g)(1). The force-placed policy is cancelled retroactive to the first day of the homeowner’s new policy coverage, not the day the homeowner notifies the servicer or the force-placed insurance is cancelled. 

The homeowner is only responsible for force-placed insurance charges related to the period starting when the homeowner’s original policy lapsed until the homeowner obtains new coverage. Any force-placed insurance premium charges or related fees paid by the borrower for a period of overlapping insurance coverage—when both the force-placed insurance and borrower’s policies were in effect—must be refunded. If charged to the borrower but not yet paid, the charges must be removed from the borrower’s account. 12 U.S.C. § 2605(l)(3)(B); Reg. X § 1024.37(g)(2).

Obtaining a new policy may raise affordability issues, but since the new policy will in most cases be less expensive than the force-placed policy, it makes sense to do so. To keep prices down, use a deductible as high as possible and any other cost coverage limits consistent with the mortgage loan requirements. Sometimes bundling a homeowners and auto policy saves money. Premium payments often can be made in installments. Shop around for the best deal. 

No Force-Placement Where Notice Is Inadequate 

Even when force-placement of insurance is otherwise proper, a servicer cannot charge for force-placed insurance unless it has complied with RESPA’s notice provisions. Reg. X § 1024.37(c)(1); NCLC’s Mortgage Servicing and Loan Modifications § 3.6.3.1. The servicer is required to refund and remove from the borrower’s account any force-placed insurance charges if it fails to provide such notice or charges the borrower before the borrower has the opportunity to provide proof of coverage as afforded by the notice.

RESPA has two notice requirements. First, the servicer must send the borrower a written notice at least 45 days before any force-placed premium charge or any fee is assessed. Disclosures include that the borrower’s insurance is expiring, has expired, or provides insufficient coverage, and that the borrower should provide proof of the required hazard insurance information for the property. Reg. X § 1024.37(c)(1)(i). If the homeowner’s coverage fails to meet loan requirements, the notice must identify the type of coverage that is needed.

The servicer must send the borrower a second written notice at least 30 days after the first notice and at least 15 days before any force-placed premium charge or any fee is assessed. Reg. X § 1024.37(c)(1)(ii). This second notice must inform the borrower that the notice is the final notice, and must include much of the first notice’s information and the force-placed insurance’s annual cost or a reasonable estimate of that cost. 

The homeowner thus has at least 45 days to provide proof that adequate insurance has continuously been in place. If the homeowner does that, and the servicer charges the borrower for force-placed insurance, the borrower should challenge the servicer action by sending the servicer a Notice of Error, and the borrower is entitled to cancel all force-placed charges and a refund of any amounts already paid.  

If, by the end of the 15-day period beginning on the date the second notice was sent, the servicer has not received proof that the borrower has had the required insurance coverage continuously in place, only then may the servicer charge for force-placed insurance. Reg. X § 1024.37(c)(1)(iii).  But the servicer may not do so if the homeowner’s insurance policy is still in force, even if the homeowner is delinquent in paying for the insurance. If the borrower’s insurance policy or state law permit the borrower to pay the premium after the due date and maintain the policy with no lapse in coverage, the borrower is considered to have maintained the coverage “continuously” and force-placement is not allowed. Official Interpretations of Reg. X § 1024.37(c)(1)(iii)-1.

Once the servicer is allowed to force-place coverage, the coverage can retroactively be applied to the date when the homeowner failed to have adequate insurance, and the homeowner can be charged for the insurance from the beginning of the force-placed coverage period, if this is not prohibited by applicable law. Official Interpretations of Reg. X § 1024.37(c)(1)(i). 

New Notice Required Prior to Any Renewal of Force-Placed Insurance

Since mortgage loans have long terms, there is a risk that expensive force-placed insurance will be renewed and charged to the homeowner year after year. RESPA requires that renewal of force-placed insurance be accompanied by additional notice reminding the homeowner to purchase standard insurance in lieu of the force-placed insurance.   

A similar multi-step notice process must occur before a servicer assesses a force-placed charge or fee for the renewal or replacement of force-placed insurance the servicer has previously obtained. However, the servicer need only provide one notice to the borrower, sent at least 45 days before charging the borrower. Reg. X § 1024.37(e)(1)(i).