Lender-placed insurance is essential to protecting a lender’s property when the homeowner does not have the proper coverage. Most mortgage contracts stipulate that the home must have appropriate insurance. This responsibility typically falls on the homeowner. The insurance policy they obtain should protect the house and their belongings inside. However, when this insurance is not in place, lender-based insurance can be a way for the bank or lender to protect their assets.
Who Needs Lender-Placed Insurance?
A bank or mortgage company should obtain a lender-placed insurance policy when the homeowner cannot or will not acquire adequate homeowner’s insurance. There may be several reasons why this may happen, including:
- Never having it in the first place
- A lapse due to nonpayment
- A simple oversight
- Not having the right amount of coverage
When this happens, the lender must notify the homeowner that their policy may have lapsed or that their policy does not have adequate coverage. If the homeowner does not respond to these notices, it is time to look into lender-placed insurance products.
Even though it is the lender who puts the insurance policy into place, it is the responsibility of the homeowner to pay for it. It will typically be more expensive for them than if they had their own insurance policy, and it usually only protects the home structure and not the borrower’s belongings.
When Should the Lender-Placed Insurance Be Enforced?
Lenders should warn the borrower that their current homeowner’s insurance needs to comply more with the mortgage terms. Sending out a couple of notices will allow them to obtain their own homeowner’s insurance. However, if they do not respond or refuse to get an adequate insurance policy within a reasonable time frame, the lender should put their own insurance policy into place.
When this happens, the lender should send a notice to the borrower detailing the terms of the lender-placed insurance and how much the premium will cost them. Sending a certified letter is the best way to do this. The policy premium is now in place and is the homeowner’s responsibility.
How Long Should the Insurance Coverage Stay in Effect?
Because of the higher premium, the homeowner will likely have to pay. They may reinstate their homeowner’s policy by catching up on their missed payments or finding a new one.
Keep the insurance policy in place until they have provided the proper documentation demonstrating that they have the required coverage. Once the lender has received the appropriate documentation, they should cancel the lender-placed insurance policy, assuming the homeowner’s insurance is adequate and in good standing.
Understanding the basics of lender-placed insurance is crucial for any lender to understand to ensure they are adequately covered. If a homeowner’s policy has lapsed, give the homeowner notice that they need to reinstate the policy. If they do not, a lender-placed insurance policy must be implemented until the homeowner provides documentation that their policy is in good standing and provides adequate coverage.
About BTC Insurance Services
Founded in 2011, BTC Insurance Services has proudly served Utah businesses with comprehensive and custom-tailored insurance coverages for a decade. We pride ourselves on fostering long-term client relationships with a personalized and hands-on approach, and have established a reputation built on quality and transparency. For more information about our products and services, we invite you to contact one of our reputable agents today at (855) 944-3457, or send us a message here.
