December 6, 2023

Wealth Matters: Insurance Dictated by the Bank

I quickly found out that we were not alone. Management companies for condominiums all around Florida offered similar tales, involving several big banks.

“It’s always one unit’s mortgage company that sends you a letter saying the condo association doesn’t maintain adequate flood insurance,” said James W. Hart Jr., president of Sentry Management Inc., which manages more than 1,300 properties. “We’ll write back and say we’re not required to do so because the condo is not in a flood plain or the association has adequate coverage. Then they say we have to prove it.”

And then, I spoke to legal services lawyers who said that the practice of bank-imposed insurance — what’s known as force-placed insurance — has become more widespread in parts of the country where foreclosures are prevalent. Property managers said areas prone to natural disasters like floods and hurricanes are also affected.

Of course, banks have every right to require homeowners to carry insurance. It’s in the mortgage contract. And if the homeowners do not have insurance, the bank buys it for them. This sounds straightforward enough, since the lender is trying to protect its investment.

But for homeowners who are already having trouble paying their mortgages, the insurance is a hefty additional burden because the bank’s insurance is far more expensive than what’s available through a commercial vendor. And then there are the homeowners like me who already have flood or hazard coverage — or do not need it — and cannot understand why they’re getting these letters.

The complaints have been numerous enough that 50 state attorneys general recommended, as part of a nationwide inquiry into mortgage practices, that limits be placed on the ability of banks to use force-placed insurance. “There are many practices that need to be changed, and this is one of them,” said Geoff Greenwood, spokesman for the Iowa attorney general’s office.

The problem is that homeowners often don’t pay much attention to the initial bank notice. And if they don’t react quickly, they will soon see the new insurance bills. Bank of America, for example, gives 45 days from the first letter to force-placing insurance on a home, said Frank Dunn, senior vice president for insurance. He said that once proof was shown, the bank would remove the policy and the charges.

Mr. Hart said he himself received a letter last year from Citibank saying he needed to buy flood insurance on his house in Longwood, Fla., or the bank would buy it for him.

“I had the home 20 years and suddenly out of the blue some guy in Philadelphia said I needed flood insurance,” he said. “They started out the letter with buying me flood insurance. I said if anyone is going to be buying flood insurance it’s me because I’m not going to buy it at your exorbitant rates.”

In the end, he said, he spent $150 for a surveyor — less than the $1,000 that he said condo associations often pay — and six weeks going back and forth to prove to the bank that his home was still not in a flood plain.

So what should you do if you receive these letters or find that you are now expected to pay into an escrow account to cover insurance that has been placed on your home?

LARGER ISSUE The first thing to understand is that there are serious ramifications if you do not quickly respond to a bank notice.

At the extreme, Alice Vickers, a lawyer with Florida Legal Services, said force-placed insurance policies often push homeowners into foreclosure. “In some cases, the homeowner has insurance and they haven’t responded at all or quickly enough to show they have the insurance,” she said. “In real time, they end up paying double. It’s difficult to extricate yourself from that.”

The proposals from the attorneys general aim to curtail how force-placed insurance is applied, how much it costs and what commissions banks receive from the companies that sell this insurance. It also bans banks from using subsidiaries to provide the insurance.

A spokeswoman for the QBE Insurance Group, which owns Seattle Specialty Insurance and Balboa, two big force-placed insurers, declined to discuss the company’s business practices.

WHO’S AT RISK For people not in foreclosure, condominiums, by their very nature, seem to prompt more letters. Part of the problem is how the insurance is written. The mortgage company is not named as a beneficiary, as it would be on a home mortgage. Instead, the association is named.

Mr. Dunn said that letters at Bank of America were automatically generated when a third-party processor noticed that a policy had lapsed.

In calling three of the major mortgage banks — Bank of America, JPMorgan Chase and Citibank — I received different explanations for why the letters were sent.

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