Many mortgage contracts include provisions that permit the lender to purchase insurance to cover the mortgaged property at the borrower’s expense if the borrower fails to obtain their own insurance on the property. This lender-placed insurance is often colloquially referred to as “force place” or “force placed” insurance. Aside from common questions regarding the usually high cost of lender-placed insurance, a question that often arises under these policies is who is entitled to receive policy benefits if there is a covered loss? In Barrios v. Great American Assurance Co., No. H–10–3511, 2011 WL 3608510 (S.D. Tex. Aug. 16, 2011), the property owners found out the hard way that they were not entitled to policy benefits.
The plaintiffs were co-owners of a commercial property in Houston, Texas. When they did not maintain insurance on this property, the lender that held the mortgage arranged for insurance to cover the property and protect its interest in the mortgage. The insurance was to be paid for by the owners of the property, but the policy benefits were to be paid directly to the lender in the event of a loss. When Hurricane Ike damaged the property, the lender filed a claim and received approximately $40,000 to repair the property. The property owners were unsatisfied with the amount that the insurance company paid, contending it was not enough to properly repair the property. The owners sued the insurance company for not paying enough and the financial institution for not forcing the insurance company to pay enough.
The court succinctly identified the issue in the case by stating, “[t]his case concerns a dispute over who is insured by a lender-placed insurance policy covering a commercial property damaged during Hurricane Ike.”
Regarding the case against the insurance company, the court held that the owners lacked standing to even bring the suit because “[t]he plaintiffs are not named insureds, additional insureds or intended third-party beneficiaries of the policy.” Although it appears that the original $40,000 in benefits was tendered to the owners so that they could repair the property, the court held that they were not an intended third-party beneficiary that would be entitled to benefits because Texas law creates a presumption against such and the policy expressly stated that they were not intended beneficiaries.
Regarding the case against the lender, the court held that the owners also lacked standing, and further “have cited no legal obligation requiring [the lender] to have exerted more effort to force [the insurance company] to pay the plaintiffs more money under the policy.” The court also found that there was no legal duty that the lender owed to the owners that would require it to have tried to get more money from the insurance company.
As these owners found out the hard way, force place insurance is usually intended to cover the lender’s interest, and the lender’s interest doesn’t always coincide with the property owner’s interest. Legal remedies may also be limited if problems arise in the claims process. For the best coverage, a property owner should seek out its own policy rather than relying on this kind of force place policy.