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Force-placed insurance is a decades-long practice that is a great deal for banks but a lousy one for homeowners. However, people have been fighting back against this rip-off – and they’re winning.
In a nutshell, if you own a home and have a mortgage, that mortgage more than likely has a clause stating that if you stop paying for property insurance, the bank can purchase it for you and then assess you a charge. The banks justify this practice on the belief that if a home is not covered and is then damaged, the owner would either pay on an uninhabitable home or walk away completely, even though that would ruin his or her credit.
But while banks think they are doing people a favor, the opposite is actually true. The policies that banks “force” on homeowners (hence the term, “force-placed insurance”) are typically a great deal more expensive than those that homeowners would be able to find on the market – as much as 10 times more, and often times they are back-dated.
The banks and the force-placed insurance brokers claim they have to charge that much because they have to insure a home. They do not have the option of choosing homes that carry less risk. However, force-placed policies may not provide the same type of coverage as a traditional policy. If you lose possessions in a storm or a fire, for example, or you have to stay in a rental home while repairs or made, you may not receive compensation.
What’s even worse is the fact that, in many instances, banks receive undisclosed commissions or kickbacks from the insurance providers.
A lot of homeowners have become fed up enough with the practice of forced-place insurance that they have taken some of the country’s largest and most powerful banks to court – and emerged victorious. In 2013, for example, Wells Fargo and the forced-place insurance provider QBE agreed to pay as much as $19 million to a group of Florida homeowners, while J.P. Morgan and Assurant, another provider, settled for about $300 million with a group of nearly 800,000 homeowners.