Lender Placed Insurance

What is lender-placed insurance?

When a person buys a home, it is very likely their mortgage contract requires the homebuyer to maintain a certain level of insurance on the property. This makes sure the home is protected at all times, including in those rare instances when a homeowner’s policy lapses or their level of coverage is not enough to cover the value of the home, were the home to be destroyed by, for example, a natural disaster.

This is where lender-placed insurance (LPI) comes in. LPI is a regulated insurance policy placed by a bank or mortgage servicer on a home when the homeowners’ own property insurance may have lapsed or where the bank deems the homeowners’ insurance insufficient.

What is the purpose of LPI?

Mortgage lenders require homeowners to maintain sufficient insurance on their property at all times. If a homeowner does not have his or her own insurance or if the policy does not meet the requirements of the mortgage contract, the lender may purchase property insurance (lender-placed insurance or LPI) to ensure continued protection.[1] In practical terms, were a fire or natural disaster to occur in the time when the home was not insured, the homeowner would have no insurance backstop to help them rebuild, and the mortgage lender would have lost the main asset – the home – that made it possible for them to provide the mortgage in the first place. The availability of LPI protects everyone involved in the home ownerships process.

Is LPI the same as “Force-Placed Insurance?”

While technically the same, LPI is never “forced” onto anyone. The homeowner agrees to maintain insurance coverage as part of their mortgage contract. If the homeowner does not maintain the required insurance, they are given at least 45 days’ notice and at least two clear letters reminding them of this loan obligation. LPI is only applied after the notice period ends and no insurance has been resecured by the homeowner. The lender-placed policy serves as a safety net to make certain the home is always protected.

How many LPI policies are placed across the country?

Every year, LPI covers only 1% to 2% of all mortgaged properties.[2] LPI cover a property regardless of condition or location of the property and is always available to homeowners in high-risk areas where other insurance may not be available.

Are homeowners notified before LPI is placed on their property?

Yes. Homeowners are required to be notified at least 45 days prior to the placement of an LPI policy with another reminder notice sent if the borrower has not responded. This notice gives homeowners the ability to renew a lapsed policy or secure their own insurance coverage pursuant to their mortgage agreement before LPI is ever utilized. The homeowner always maintains the choice to secure their own insurance, cancel the LPI, and receive a refund of any LPI premium paid that overlaps with the personally selected insurance coverage

What do I do if I receive a letter stating I need to provide proof of insurance coverage or my lender will place a policy?

Make sure you have your own homeowner’s insurance and send proof to your mortgage servicer.[3]

What does LPI cost?

The industry has observed that an LPI policy is typically more expensive than the homeowner’s insurance policy it replaces. LPI is generally more expensive because it is provided regardless of the condition or location of the property. As a result, insurance companies that underwrite LPI have a higher exposure to potential claims, especially in locations with higher incidents of hurricanes, fires, and other natural disasters. LPI is always available for homeowners in high-risk areas where other insurance may not be available.

Is LPI regulated by consumer protection laws?

Yes, federal and state laws regulate LPI. State insurance regulators having primary responsibility for overseeing LPI insurers, and federal financial regulators generally oversee the servicers that purchase LPI coverage for their portfolios.[4]

Which laws regulate LPI?

At the federal level, the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010 put in place federal requirements to help homeowners understand their mortgage obligations and their choice to maintain their own insurance. As a result, homeowners are required to be notified at least 45 days prior to an LPI placement and a second notice is sent if the homeowner has not responded. The Dodd-Frank Act also created new procedures for terminating an LPI policy and issuing refunds when a homeowner has secured their own insurance coverage. In addition, the Flood Insurance Act and related regulations specify procedures for placing LPI in flood zones.

At the state level, LPI rates are reviewed by state insurance authorities with input from consumer advocates and industry. The National Association of Insurance Commissioners (NAIC) requires insurance companies to annually submit state-level LPI data for each state in which they operate.[5]

Are homeowners required to accept the LPI policy?

Homeowners are required to maintain adequate insurance on their home throughout the duration of their mortgage. In the rare circumstance when LPI is deemed necessary to protect the home, it is cancellable at any point. As soon as a homeowner provides proof of adequate insurance as required by their mortgage, the LPI policy is terminated and any overlap in premium is refunded to the homeowner.