What is Force-Placed Insurance?
a.k.a Lender-Placed Insurance or Collateral Protection Insurance
Mortgage loans include a requirement that the borrower maintains insurance to protect the property serving as collateral for the loan and, if the borrower fails to maintain the required insurance or fails to provide the required evidence of insurance, the lender, through the loan servicer, may place insurance on the property serving as collateral for the loan and charge the borrower for this insurance.
History of the Real Property Force-Placed Insurance Model Act
During the Great Recession, the collapse of the housing market brought many unscrupulous corporate practices into the light. Force-placed insurance was one of them. Historically, the force-placed insurance industry was not well regulated and remains that way today. The National Association of Insurance Commissioners (NAIC) did develop a Creditor Placed Insurance Model Act in 1996, however, most states did not pass the 1996 Model Act. The 2008 Great Recession saw an influx of homeowners defaulting on their private insurance and ending up on lender-placed policies. The ensuing civil litigation exposed abusive corporate practices, including kickback schemes within the force-placed insurance industry. In 2012, the NAIC formed a force-placed working group and held its first public hearing. In 2015, the Federal Government Accountability Office produced a report highlighting the need for greater oversight and data collection on force-placed insurers. The NAIC’s force-placed insurance working group model act was supposed to be completed in 2015. The development process was delayed by industry requests for 2 model acts, one for real property and the other for personal property. According to NAIC officials, they completed a data call in 2017 and used it to support a multi-state investigation and settlement with two force-placed insurers. NAIC officials initiated a broader data call effort that began in 2018. The NAIC force-placed insurance working group finally completed its Real Property Model Act in 2020.