Forced-Placed Insurance Terms Force Homeowners' Wallets

New York, NYThe term 'forced-placed insurance' might be one you have yet to hear, but you soon might—especially if you live in a flood-prone area, or if you have a financial liability with a lender having recently discovered the profits made possible by mandating additional forced-placed insurance terms on a homeowner.

The Post Standard of New York reported May 20, 2012 that US Senator Chuck Schumer has identified a trend amongst lenders and financial institutions to require of homeowners the purchase of more costly flood insurance based on the full replacement cost of the home, rather than the outstanding value of the loan.

The issue can have a significant impact on a homeowner.

One such homeowner is Gordon Casey, who is disabled and serves as the lead plaintiff in a forced-placed insurance class action. According to the Post story, Casey's annual cost for flood insurance jumped from $325 in 2002 to $1,428 this year. His mortgage lender unilaterally switched his liability from the outstanding value of his mortgage, to the full replacement cost of his home.

The Post reported the lender's assessment of replacement value at $237,349—yet his home, according to the report, carries a current market value of $68,000.

Another plaintiff in a forced-placed insurance class action is Dennis Cook, who applied for a home equity line of credit in 2003 with M&T Bank. According to the report, the credit line required the purchase of additional flood insurance on his home to cover the value of the line of credit. Cook duly complied.

Citizens Bank soon acquired his account and the same standard was maintained until 2010 when, according to the report, Citizens adopted a new standard for flood insurance based against the full replacement cost of the home. The lender unilaterally purchased additional insurance valued at $54,000 in a forced-placed fashion on behalf of Cook, whose premium doubled.

Yet another forced-placed insurance lawsuit was filed in US District Court for the Northern District of California on May 1, 2012 on behalf of plaintiff Shelly Clements, who purchased a condo in Richmond, California in 1999 without the need or requirement for flood insurance. According to Globe Newswire (5/3/12), a re-finance in 2005 required no change in the position of the lender, Washington Mutual, relating to flood insurance.

However, following the failure of Washington Mutual, Clements' mortgage was assumed by JP Morgan Chase (Chase), who asked Clements in 2010 to provide proof of flood insurance. The plaintiff alleges that Chase notified her a month later that forced-placed insurance had been taken out on her property by the lender, with Clements held responsible for the premiums.

Clements' lawsuit alleges the forced-placed insurance mandated by the defendant may be inferior to typical flood insurance coverage historically available through the National Flood Insurance Program—at rates up to ten times higher for the allegedly inferior coverage. The lawsuit further alleges that Chase obtains the insurance from an affiliated brokerage entity in which Chase has a financial interest, and from which the defendant received commissions and other benefits.

Schumer says such forced-placed insurance terms "slams homeowners with hundreds or even thousands of dollars a year in extra insurance premiums that they can ill afford to pay."