Insurance Requirements For Lender Forced-Placed Hazard Insurance

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Question:

Regarding the lender forced-placed hazard insurance, is the lender required by any regulation to insure for loan balance or for current replacement cost. If the lender only insures for loan balance, are there specific disclosures that need to be made to the borrower to relieve the lender of exposure to litigation for not insuring the borrower's equity in the collateral?

Answer:

Unless your state law has a specific requirement, I don't know of anything that provides guidance.

To avoid an allegation that you have engaged in an unfair or deceptive practice, however, I would be sure that you clearly communicate to the borrower the nature and extent of the protection you have obtained through the force-placed insurance, so that in the event of damage or destruction of the collateral, the borrower won't be saying, "But I thought it was fully insured. . ."

I also believe lenders should stress to the borrower that forced-placed coverage is typically more expensive than the coverage the borrower could procure directly. I have talked to many bank customers over the years who believed the bank would have some sort of special deal or group rate and that they would actually be better off if the bank purchased the insurance than if they did so themselves -- which isn't the case at all.

First published on BankersOnline.com 5/06/02