Oct. 22, 2012 - Insurance Commissioner Dave Jones today announced a 30.5 percent rate reduction, for "lender-placed" (also called force-placed) homeowner insurance coverage offered by American Security Insurance Company (an Assurant Inc.-owned company). The reduction will result in an estimated $42.7 million savings to homeowners, with an average savings to policyholders of $577 annually.
Force-placed insurance has been subjected to controversy because, under certain circumstances, homeowners are forced to purchase the policies. These policies are primarily intended to protect the lender's interest in the property and typically come with exorbitant costs that are often much higher than standard homeowners insurance policies.
In March, Commissioner Jones contacted the state's largest "lender-placed coverage" insurers to express his concerns about apparent excessive rates. He directed insurers to submit new rate filings with the California Department of Insurance (CDI) to determine if rates could be reduced. Force-placed insurance has been the subject of national scrutiny and there have been investigatory hearings regarding this insurance in the states of New York and Florida, as well as at the annual meeting of the National Association of Insurance Commissioners (NAIC). At the Commissioner's direction, CDI carefully examined the insurers' annual financial statement data, and found many cases of low loss ratios. The low loss ratios (the percentage of every premium dollar an insurer spends on actual claims) were a flag to Department officials that rates charged by insurers may be excessive. Insurers were directed to provide a response to CDI by April 1, 2012. Today's rate reduction is a result of the efforts taken by the Commissioner earlier this year. American Security is the first insurer to lower rates based on the Commissioner's action.
"This is a significant rate reduction for many California homeowners," said Commissioner Jones. "At a time when scores of Californians are facing economic uncertainty and underwater mortgages, we heard complaints from homeowners being forced into lender-placed policies at exorbitant prices. My directive for insurers to submit new rate filings, and subsequent review of those filings, confirmed that rates were indeed excessive and needed to be lowered. An annual savings of $577 on average will come as a welcome relief to American Security's policyholders. With an estimated 2012 gross written premium of $140 million, American Security is to be commended for being the first insurer to lower its rates."
The new rates will be implemented within 90-days, and will apply to policies issued or renewed by American Security. This reduction will benefit approximately 74,000 American Security policyholders.
What is forced-placed or lender-placed coverage?
When an individual obtains a loan in order to purchase a property, the mortgage requires the borrower to carry insurance for that property. In other words, the property is collateral for the loan and the lender wants the value of that collateral protected by insurance. Typically, the borrower's insurance policy is endorsed to name the lender. If at any time the insurance coverage is canceled or not renewed, the lender may, in accordance with the mortgage provisions, purchase insurance on the property on behalf of the borrower (to protect the lender's interest in the property) and is allowed by contract to charge the borrower for the cost of that insurance. This is called lender-placed or, commonly, force-placed insurance. The lender-placed coverage typically includes only the perils of fire and allied lines, such as smoke, wind and vandalism damage, which means that the coverage is much more limited than homeowners coverage as it does not include personal property, liability or additional living expense coverage, as examples.
"These policies can be very expensive and the coverage is typically much more limited than the standard homeowners policy," said Commissioner Jones. "Therefore, I can't stress enough that, even in these difficult economic times, it's important to protect your primary asset - your home - by making your homeowners insurance payments. Do not let your homeowner insurance policy lapse. Don't be forced into forced-placed insurance."
The Commissioner urged homeowners to contact his department if they felt they were unfairly placed into a lender-placed policy. CDI recently assisted a homeowner who was refinancing his home and learned that his lender had forced-placed a policy for the previous full year's term, though the homeowner already had a policy in place. The premium for the annual term was $4,946 and due to the time at which the erroneous charge was detected, a renewal policy was already in place for an additional $4,946. However, once CDI questioned the insurer providing the forced-placed policy regarding the legitimacy of its action, the carrier issued a refund of the entire amount for the previous term as well as a refund of the partial year that was also assessed. This led to a combined recovery of $9,892 for the homeowner.
The Department is also contemplating regulations that would require all insurers that write lender placed property insurance to file the rates as a commodity rather than as a specialty line. Filing as a commodity restricts the insurer's ability to deviate from the standard prior approval template. Traditional homeowners insurance and personal automobile insurance are already required to file as commodity coverages and the proposed regulation would eliminate the exemption that exists for the high premium master policies that provide lender placed property coverage. A "workshop" discussion of the proposed regulations is scheduled for October 25.
Following are tips to homeowners with lender-placed insurance:
- If your insurer hasn't renewed your homeowners policy because you didn't pay your premium, you may be able to get your insurer to reinstate coverage if you bring your premium up to date.
- Try to get coverage with another insurer. Remember, it's a very expensive policy which can make it harder for homeowners to avoid foreclosure by becoming current on their mortgage balances.
- The FAIR plan (http://www.cfpnet.com/) is also an option if you cannot find insurance in the private market.
- Call the Department of Insurance Consumer Hotline at 800-927-HELP (4357).
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