What Is Lender Placed Insurance and How Does It Work?
Understand lender placed insurance: what it is, why lenders use it to protect collateral, and how to address it if it impacts your loan.
Lender-placed insurance (LPI) is an insurance policy that a lender obtains when a borrower’s own insurance coverage on a financed asset, such as a home or vehicle, is deemed insufficient or has lapsed. This type of insurance primarily protects the lender’s financial interest in the collateral.
Understanding Lender-Placed Insurance
Lender-placed insurance, also known as force-placed insurance, is purchased by a loan servicer or bank to protect their financial interest in a mortgaged property or vehicle. Unlike a borrower’s own policy, LPI focuses solely on the collateral. It typically covers perils like fire, windstorms, or physical damage.
LPI does not include coverage for personal property, liability protection, or other comprehensive coverages found in a standard policy. Premiums are paid upfront by the lender but charged back to the borrower, added to the loan balance or monthly payments. This significantly increases financial obligations, as LPI is much more expensive than a policy a borrower could obtain independently.
Reasons for Lender-Placed Coverage
Lenders initiate lender-placed insurance to protect their collateral when a borrower fails to maintain adequate insurance as stipulated in the loan agreement. This can occur if the borrower’s existing insurance policy lapses, or if they fail to provide the lender with proof of valid coverage.
LPI can also be placed if the borrower’s policy does not meet the lender’s coverage requirements, such as insufficient dwelling coverage or the absence of flood insurance in designated flood zones. LPI mitigates the risk of uninsured losses to the collateral.
The Lender-Placement Procedure
When a lender determines a borrower’s insurance is insufficient or lapsed, they initiate a procedure to place insurance. Lenders are required to send an initial notice at least 45 days before purchasing a force-placed policy. This notice informs the borrower of the deficiency and provides an opportunity to rectify the situation.
A second, reminder notice is sent no earlier than 30 days after the first, and at least 15 days before the lender charges the borrower for LPI. This notice includes the estimated cost. Once placed, LPI premiums are added to the borrower’s loan balance or monthly payments, often retroactively to the date coverage was deemed insufficient. These policies can cost 5 to 10 times more than a standard policy.
Steps to Address Lender-Placed Insurance
If LPI has been applied, prompt action is necessary. Gather all relevant documents, including the original loan agreement, notices received from the lender, and proof of existing or newly acquired insurance. This documentation supports any claims.
Next, contact the lender’s insurance department or a designated representative to discuss the LPI. Provide your loan number and explain your situation, submitting proof of valid insurance coverage, such as a declarations page. Demonstrate that you have adequate coverage meeting the lender’s requirements.
Once you provide proof of valid insurance, formally request cancellation of the LPI policy. Ask for a refund of any premiums charged for periods where your own valid insurance was in effect, as servicers are required to refund overlapping costs within 15 days of receiving proof. Monitor your loan statements to ensure LPI charges are removed and refunds processed.