Embedded in almost any residential mortgage or deed of trust, mortgage lenders include a requirement that homeowners maintain an insurance policy covering the improvements erected on the property, such as the house, garage, shed, or pool. Where a homeowner’s policy of insurance lapses, most insurance policies will allow your mortgage lender to obtain “lender-placed” or “forced-placed insurance.”
Lender-placed insurance policies almost predominately protect just the mortgage lender after a covered loss, not the homeowner. For example, the Standard Deed of Trust for a Fannie Mae loan in the state of Colorado allows your mortgage lender to procure lender-placed insurance:
If Borrower fails to maintain any of the coverages described above, Lender may obtain insurance coverage, at Lender’s option and Borrower’s expense. Lender is under no obligation to purchase any particular type or amount of coverage. Therefore, such coverage shall cover Lender, but might or might not protect Borrower, Borrower’s equity in the Property, or the contents of the Property, against any risk, hazard or liability and might provide greater or lesser coverage than was previously in effect.
If your mortgage lender obtains lender-placed insurance, it does not have to obtain coverage to protect the homeowner, so it will typically only protect its own interest in the improvements on the property. So, without a homeowner’s policy of insurance, the lender-placed policy likely will not cover any built-up financial equity a homeowner may have in their home or any insurance to replace personal property after a loss. For these reasons, homeowners cannot rely on lender-placed policies and must maintain a sufficient policy of insurance of their own.
If you find yourself in a situation where your mortgage lender has procured lender-placed insurance, the Consumer Financial Protection Bureau (CFPB) – the federal watchdog in charge of regulating all things mortgage – has provided helpful tips titled, What can I do if my mortgage lender or servicer is charging me for force-placed homeowner’s insurance?