The answer is “YES!” unless you follow my strategies shown below.
I learned first hand about mortgage escrow accounts back in 2003-2005 when I was working as a Claims Examiner for a huge insurance company. Their product was Forced-Placed Hazard Insurance, which is a property insurance policy sold to mortgage companies.
Here’s how it works when YOU choose your homeowner’s insurance and pay it through your escrow account.
When you buy a home, part of your closing costs customarily is the first premium payment for your homeowner insurance. After that, the insurance company sends their bill to the mortgage company. Part of your monthly house payment pays 1/12 of your annual homeowners insurance premium. The insurance company is sure to get their premium paid as long as you (a) have an escrow account, and (b) as long as you own the house, and (c) as long as you keep making your monthly house payment.
But there are BIG, BIG problems with mortgage escrow accounts. These problems are happening with much greater frequency than just a couple years ago. Foreclosures are only PART of the problem, and that’s a topic for another article.
“Forced-Placed” coverage nightmares
Pull out your file for the closing on your house. In the mortgage, there is a clause that allows the lender to buy a “Forced-Placed” insurance policy on your house if the insurance is cancelled for any reason. So, if you are a homeowner, and your policy gets cancelled for any reason, the bank will pay the premium for you and charge it to your escrow account.
Sometimes, the mortgage companies sell their mortgages in big portfolios to other lenders. When that happens, the buyer gets all of that escrow money, too. In the confusion surrounding the sale of those mortgages, and the time it takes to do the deal, the buyer sometimes fails to make premium payments on time. When that happens, some policies occasionally get cancelled.
Sometimes, lenders just screw up and forget to make premium payments…even when the money is in the escrow account and it’s no fault of the homeowner. And sometimes the lenders fail to notify the homeowner that they have no insurance. The homeowner finds out when they have a claim.
Sometimes, people don’t automatically renew their policies that are in escrow, and the policies cancel.
Sometimes, insurance companies cancel homeowner policies, and the insurance companies send the cancellation notices only to the lender, and the homeowner never knows his policy was cancelled. The homeowner finds out that things have changed when he has a claim.
In each of these examples, the home ends up without insurance coverage. Banks and mortgage companies do not like having loans on properties without insurance. If the house burns down, so does their equity. That’s the reason for “Forced-Placed” policies.
The BIG problem…the HUGE problem for YOU…the homeowner…is that the bank only cares about THEIR MONEY. They don’t care about you, the contents of your home, your legal liability, or where you’ll live if you have a fire and can’t live in that house. They usually only write the “Forced-Placed” policy for the unpaid balance of the loan.
Lenders don’t care about the replacement cost of your property. Forced-Placed coverage usually only covers the outstanding loan balance on your mortgage. So, if you had a house worth $150,000.00, and a loan balance of $50,000.00, the lender would buy a policy for $50,000. The lender only cares about getting the loan paid off.
What if your house is worth $150,000.00, and your loan balance was only $50,000, and you have a total loss fire with their coverage?
You are going to have a very bad, life-changing experience, that’s what!!
Normally, your property insurance covers your liability. Lenders don’t care about your liability exposure. They don’t care if a delivery man falls on your property and sues you for six figures. Forced-placed coverage only covers the outstanding loan balance on your mortgage. There is no liability coverage.
Another very bad, life-changing experience.
Normally, your property insurance covers your contents…your personal property, like your furniture and other belongings. Lenders do not care about your contents. They don’t care if everything you own is destroyed. Forced-placed coverage only covers the outstanding loan balance on your mortgage. There is no contents coverage.
Another very bad, life-changing experience.
Normally, when a homeowner buys insurance to protect his home and contents, the policy also has coverage for Additional Living Expenses. Lenders do not care if you are forced out of your home because something happens that makes your home unfit to live in. Lenders don’t care if you have to live temporarily in a homeless shelter. Forced placed coverage only covers the outstanding loan balance on your mortgage. There is no ALE coverage.
Another very bad, life-changing experience.
Also remember that the LENDER owns the forced-placed policy on your property, not you. The settlement checks will go to them, or perhaps made payable to the lender and you. But they usually won’t let you cash the check.
When I worked for that insurance company, I regularly talked to people who said that the first time they were aware of the forced placed policy is when they filed a claim. Their old insurance company sent the premium notice to the lender, who missed the premium due date, and the policy cancelled. The lender then forced-placed a policy on the property.
So, what do you do if this happens to YOU?
One of these scenarios will explain your situation:
1. You were negligent, and allowed your policy to lapse. It’s not the lender’s fault. The insurance company notifies the lender of the cancellation date. The lender forced-placed a policy for the loan balance. You have a claim.
What do you do? Go to the website for the author, found at the bottom of this article, to learn how to take control of your claim. Then, as soon as the claim is completed, buy your own policy and cancel the one the lender owns. Just make sure that you have coverage IN PLACE before you cancel the lender’s policy.
2. The lender was negligent, and allowed your policy to lapse. Then, the lender force-placed a policy for the loan balance. You have a claim.
What do you do? ALERT!!!! Get an attorney involved IMMEDIATELY!! Don’t wait!! Don’t try to be a nice guy!!
Get your documentation in order. Make sure that you can prove it was the lender’s fault that the premium was not paid. Next, have your attorney call the person at the lender who manages the Escrow Department. Explain what happened, and ask them what they plan to do to make things right. If they fix the problem and you don’t suffer any loss from their negligence, then all will be well.
How does the lender fix the problem THEY created?
The bank could contact your insurance company and accept liability. Many times, the insurance company will allow the bank to make the premium payment and reinstate the policy. Once that’s completed, you can proceed with your claim based upon the insurance policy that you did have before the cancellation.
The lender could accept liability and pay your claim out of their own pocket. You’ll usually see donkeys flying around outside your house right before this happens.
If the insurance company will not allow the policy to be reinstated, then you must seek damages from the lender itself. Your attorney must file a lawsuit against the lender.
Watch this carefully!!
1. If you have an escrow account through your mortgage lender, make sure that your homeowners insurance policy is in force at all times.
2. Call your homeowners insurance company, and make sure that they are sending renewal notices and premium notices to you, not just your mortgage company. Too many mistakes happen too frequently to trust your mortgage lender to take care of your business.
So, you cannot afford to place all your assets and your property at risk by trusting someone else to handle your money for you. You cannot just pay your monthly mortgage payment and forget it.
The strategy is to make CERTAIN that your escrow account keeps your Homeowners insurance policy in force AT ALL TIMES!
This strategy ALONE could save you, the homeowner, hundreds, perhaps many thousands of dollars of insurance benefits.
Final, final thoughts! Your mortgage contract probably states that the mortgage company will replace your coverage in the event of the cancellation of your insurance coverage. However, if the mortgage company force-places an inferior policy, a true “replacement” of coverage has not occurred. Point this out to your attorney. You might have a very compelling cause of action against the mortgage company!!
Check out: http://www.insurance-claim-secrets.com