Force Placed Insurance

How insurers make BANK & how banks profit from insurance 

By Brya Arcement 

Did you know: if you don’t maintain home insurance on your home, the bank or mortgage servicer can do it for you? Sure, your home is the bank’s collateral, and they need to protect their assets. But when does this become insidious? Walk with me as we go deeper into the underbelly of the insurance world. 

For the longest, I never really gave insurance a thought. Like most people, I assumed that insurance, in all forms, was just a backup, a way to replace high priced items like a home, a car, or maybe even rare art. And in its most basic form, it is, right? 

Now, force-placed insurance is where the system gets pretty dark. When folks fall behind on their insurance payments during tough times, they often get an unwelcome surprise. Their bank has picked their insurance for them, and it might be several times the normal price; the kicker is that it barely protects them at all.

So what is FPI and why does FPI even exist?

Okay, now that I have your attention, you’re probably wondering, “what is force-placed insurance?” Like surplus lines insurance, this is a creature of many names. If you ask an industry lobbyist, they’ll insist it’s called lender-placed insurance. Because there is no “force” (eye roll). Whether it is referred to as lender-placed or force-placed, both terms mean the same thing. This type of insurance kicks in when someone’s required home or flood insurance policy lapses for any reason. The bank then buys coverage on your behalf and adds it to your mortgage payment. 

Force-placed insurance has been around and a staple in mortgage contracts for a long time. Your home secures your mortgage. It’s their collateral. So, if your house burns down without insurance, both you and the bank are SOL. 

Supposedly, it covers the extra work and risk of insuring these properties. In theory, I guess it makes sense. But in practice? Let’s chat about it. 

We’ve already established that FPI protects banks, not you. This is the MOST important thing to understand, and it’s bananas. FPI protects the outstanding amount on a mortgage. Not your personal belongings, not you, not your family. That means a FPI policy might only cover the amount left on your mortgage. If you’ve already paid off most of your mortgage, the bank could take the small insurance payment, pay off the mortgage, and walk away, leaving you without the money to rebuild.

Unlike regular homeowners’ insurance, force-placed coverage also typically doesn’t cover: 

• Your personal belongings
• Hotel or rental costs if you can’t stay in your home after a disaster
• Liability if someone gets hurt on your property 
• A lot of the things you ACTUALLY need insurance for

So if your home gets damaged for any reason, the insurance payout goes straight to the bank. You might walk away with absolutely nothing, zip, NADA for your personal losses. You’re paying for insurance that doesn’t really insure you. 

Climate change puts an insidious situation on steroids

Then there’s climate change, making a bad situation worse. As climate-driven disasters make insurance more expensive, companies are pulling out of what they deem as “risky” areas completely. This is already a major problem for areas currently dealing with insurance chaos (looking at you, Florida, California… and apparently Minnesota?). Homeowners are finding regular insurance either too expensive or straight-up impossible to get. 

Just imagine you’re a homeowner in California and you can’t afford regular insurance or find a company willing to cover you. The state-backed last resort option (typically called the “FAIR” Plan) is one backup. But that might be even more expensive. If you can’t afford that, then your policy lapses. And boom, your bank puts you on a force-placed insurance plan. FPI could become far more common for struggling families just trying to keep a roof over their heads. 

…and the prices, because it’s ALWAYS about money

Remember when I said prices might be exponentially higher than regular insurance? Let me paint a picture for you, dear reader. Force-placed insurance can cost way more than what you might normally pay for homeowners’ insurance. FOR LESS COVERAGE. You know what that sounds like? It sounds like the bank and the insurance company are in cahoots and have a pretty sweet deal. You’re stuck in the middle. 

Many of these policies also come with another sneaky provision called a forced arbitration clause. I’ll spare you from my rant on that for now, but here’s the basics: If you think you’ve been messed over, you might not be able to take the lender or insurer to court. Instead, you’re forced into a rigged arbitration system chosen by the insurer, which limits your legal options and makes it harder to join class action lawsuits with other folks in the same boat. 

Real cases, real damage, an unending cycle

This is when it gets truly heartbreaking. FPI hits folks who are already drowning, those who couldn’t afford regular insurance in the first place. Homeowners most commonly end up with FPI when they can’t afford to keep up with their insurance payments. FPI played a nasty role in the 2008 financial crisis and everything that came after. Homeowners who couldn’t afford their mortgages stopped making payments, and often stopped making their homeowners’ insurance payments too. And who’s most likely to face that situation? Families who are already on the financial edge. Look at you, paying attention. 

Force-placed insurance overwhelmingly harms low income communities and communities of color. This isn’t a coincidence; it’s a predictable pattern that follows the same path as other predatory financial practices exposed during the 2008 crisis. In 2006, the rate of subprime mortgages for Black Americans and Latinx folks was almost double that of white people (racism finds its way into everything, doesn’t it?) 

Black and Latinx homebuyers were hardest hit by the foreclosures that resulted from predatory lending, lower homeownership rates, and less generational wealth, and then got slammed with FPI when they couldn’t afford to maintain their policies. Foreclosure rates during the crisis were drastically higher in Black and Latinx communities. 

Do you see the connection? The communities that were already targeted by predatory lenders were the same ones that ended up with these exploitative insurance policies layered on top of their struggles. 

… and the scheming of it all

Because the bank selects the policy but doesn’t pay the price, there’s not much incentive to keep the cost down. Regulators at the New York Department of Financial Services (NYDFS) looked into this and discovered what they called “reverse competition.” Instead of insurance companies competing to offer you lower prices (like capitalism is supposed to work, in theory), these companies have competed in the past to see who could offer banks the best kickbacks. Tell me, reader, why is it so hard for financial institutions to do the right thing?! Good grief. 

A real-life investigation uncovered that one bank put itself on both sides of the transaction. The bank paid inflated premiums to the largest force-placed insurance provider and then turned around and got most of the money back through a reinsurance deal with a subsidiary. 

The proof is in the puddin’

Abuses from the 2008 financial crisis ultimately led to new rules from the Consumer Financial Protection Bureau, the Federal Housing Finance Agency, Fannie Mae, Freddie Mac, and individual states stepped in to establish requirements around kickbacks and notice periods. 

On February 9, 2012, in a settlement with the federal government and 49 state attorneys general, 5 big banks agreed to pay $25 billion related to homeowners who lost their homes in the financial crisis. Since then, class action lawsuits have followed. In 2024, JPMorgan Chase agreed to pay more than $22 million to settle a class action lawsuit alleging the bank forced homeowners to pay for flood insurance that cost 10 times more than it should have. 

While those settlements sound big, they aren’t enough. FPI insurance is a major profit center. The NYDFS investigators found insurance companies were telling regulators they expected to pay 55% -58% of premiums in claims. Meanwhile, they were actually only paying out less than 25%. Bring back shame, people!

Mask off

Despite settlements, reforms, and regulatory actions, the penalties are too small, especially when insurers are making BANK. While class actions have continued, even the largest settlements only mean so much to such a lucrative industry.

Listen, Linda, as climate change leaves more folks struggling to afford their insurance, the risks will only grow. And while state programs like the FAIR Plan can be a backup, struggling homeowners may not be able to afford those premiums for long. 

Regulators can start by, at a minimum, collecting and publishing better, up-to-date data on the costs and who is paying them.  Without oversight and enforcement, FPI can function as a hidden tax on financial hardship. But now that you know about force-placed insurance, you can do something. Tell a friend, a family member (maybe a state representative), because the more folks that know this hidden system exists, the more exposed it becomes.