Hazard insurance is required on any property where a mortgage company or bank has a financial interest, such as a mortgage or equity loan. Such property includes residential and commercial real estate. Sometimes the lender discovers a property is not insured. When this occurs, the lender will automatically provide lender-placed hazard insurance. The following discusses the principles of hazard insurance on residential property while the same principles also apply to commercial property.
Hazard Insurance
Hazard insurance is purchased by the owner for the home and personal belongings in case of a fire or other covered cause of loss. If a mortgage is taken out on the property, the lender has a financial interest in the home. If a loss occurs, the lender wants to make sure enough insurance coverage is in place in order to satisfy the loan balance on the property.
Hazard Insurance Requirements
Hazard insurance is required by the lender at the time of escrow closing on a home. The amount of coverage cannot be less than the loan balance, and there should be enough coverage to satisfy the replacement cost for any property damage caused by a loss. Replacement cost is the cost to replace the property with comparable material and quality. The lender will also require the homeowner's insurance company to have acceptable ratings according to standards such as Best's Insurance Reports. The lender is satisfied as long as the amount and type of hazard insurance protects its financial interest.
Lender-Placed Hazard Insurance - The Force-Placed Policy
When homeowner's insurance is not in effect, the lender will automatically take out lender-placed hazard insurance. This type of insurance policy is called a force-placed policy. If, for example, a fire occurs when a force-placed policy is in effect, the lender collects the insurance benefits to satisfy the loan balance. This policy does not provide insurance coverage for personal belongings nor does it provide insurance coverage for the replacement cost of the home or its actual cash value. Actual cash value is typically the cost to replace property with comparable material and quality less depreciation.
Reasons for Lender-Placed Hazard Insurance
There could be several reasons why a force-placed policy takes effect. The policy premiums may not be paid resulting in a lapse of coverage or a cancellation of the policy. The homeowner's policy may not meet acceptable standards according to the lender, or the lender mistakenly does not receive any record of insurance at all. In any of these circumstances, the lender will take out a force-placed policy.
Cost of Lender-Placed Hazard Insurance
The cost of lender-placed hazard insurance may be less expensive than homeowner's insurance, but the homeowner should also be aware that lender-placed hazard insurance does not include liability insurance if someone is injured on the premises and does not pay for damage to the property. The lender does not pay for lender-placed hazard insurance. The cost is added to the loan balance.
Tags: force-placed policy, lender will, loan balance, financial interest, Hazard Insurance
