What Is Lender-Placed Homeowners Insurance

Homeowners insurance is said to be a necessity if you own your home. But there are millions of Americans who don't have this kind of insurance. And the reasons vary; some may view homeowners insurance as yet another monthly expense, and may find it more reasonable to pay out-of-pocket for a large potential loss than to pay for protection against that loss indefinitely. Another common reason is the misperception that natural disasters or a claim going bad is not something that will happen to them.

Of course, the economic climate is another very popular reason why so many don't carry insurance. In watching every penny that eaves a household, oftentimes homeowners insurance is not high on the list of priorities that allow for normal daily life to continue uninterrupted.

This is where lender-placed insurance comes in. Even if a homeowner doesn't have coverage, lender-placed insurance ensures that everyone involved should a disaster occur is shielded.

Coverage Is a Requirement

Once the approval of a home loan occurs, the borrower must have an adequate amount of insurance on their property to protect them against hazards such as fire and burglary. Part of the lender's job is to make sure that any homeowner's property is insured.

But what happens when a homeowner's insurance coverage lapses due to whatever reason? The 

homeowner does not go without coverage. Instead, the mortgage lender purchases coverage for the property. This, called lender-placed insurance, is in place until the homeowner can once again obtain coverage in the amount dictated in their mortgage terms. But not only does lender-placed insurance protect the homeowner's property; it also protects the interests of the lender.

The Responsibility of Insurance

Both the homeowner and the lender are responsible for coverage on the property. The homeowner must have coverage in order to meet the terms of their mortgage and remain in good standing with their loan. But should that coverage lapse, the responsibility rests on the shoulders of the lender.

The lender must ensure continuous coverage on a property, as dictated by government-sponsored organizations like Fannie Mae.

What Lender-Placed Insurance Covers

Usually, lender-placed homeowners insurance offers minimal coverage, mostly to the property's structure itself. This means that no liability coverage is available, nor are any personal contents covered. Based on replacement cost, lender-placed insurance will ensure the repair or rebuilding of the structure in the event of any damage.

The Cost to Homeowners

Unfortunately, these lender-placed insurance policies can end up costing homeowners more money. There are a few reasons why this happens. Lenders usually get policies that cost more, but cover less than insurance the homeowner can go out and get themselves. As well, a number of lenders have been known to purchase policies for homeowners that aren't needed.

The latter reason is what has caused the Consumer Finance Protection Bureau to insist that lenders meet some requirements prior to purchasing these higher-cost policies for their clients. Among them, warning clients that they will purchase insurance for them should they not do it themselves, and disclosing how much this lender-placed insurance will cost prior to purchasing it for clients.

What to Watch For

Lender-placed insurance coverage can extend to flood insurance. And so it's important to check the flood zones in your area. When you do, keep in mind that even if your home isn't in a flood zone that your property can be. This occurs in cases where the flood zone only applies to a part of your property.

Lender-placed policies can be applied when the lender mistakenly assumes you don't have insurance coverage when you do. Correcting this error can be an issue, because often, it's the insurance company, and not your lender that you will be speaking with. This can result in your hitting a proverbial brick wall, as the lender's insurance company won't have a vested interest in correcting the mistake.

Guest author Carly Jorge writes on a variety of topics, but is particularly well-versed on insurance.  She is a regular contributor at The Home Protection Geek, a site that provides free home owners insurance quotes to consumers.  You can also find Carly on Google.