It is not a pleasant experience to have your homeowner's insurance company cancel your coverage. If that happens, you are not in immediate danger of losing your mortgage -- the lender would have to repossess your home. However, your mortgage lender will take steps to protect its interests, and you will bear the costs. You should try to get replacement coverage as quickly as possible.
Your mortgage agreement requires you to maintain adequate insurance coverage on your home. Homeowner's insurance pays if the home or your personal property is damaged, or if you are sued for something that happens in your home. For many homeowners with a mortgage, the mortgage servicing company will collect the cost of the homeowner's insurance premium as part of your monthly escrow payment. The mortgage company then makes the annual premium payment for the insurance.
If you lose your homeowner's insurance coverage or the mortgage lender believes you do not have enough insurance coverage in place, the lender will buy insurance to cover your home. This insurance is referred to as lender-placed or force-placed insurance. The forced-place insurance protects the lender's interest in your home and keeps your mortgage agreement intact. The lender will include the cost of the lender-placed insurance in your escrow payments so you pay for the coverage put in place by the lender. Your mortgage company should send you a notice about obtaining and placing insurance on your home.
Lender-placed insurance is almost always more expensive than insurance coverage that you can buy on the open market. In May 2012, testimony by a Legal Aid Society attorney to the New York State Department of Financial Services gave examples of force-placed policies that cost six times as much as the insurance coverage that a homeowner could find on his own. If your lender buys insurance to cover your home and mortgage obligations, your monthly house payment could increase by hundreds of dollars a month.
Find Replacement Insurance
If your homeowner's insurance company drops your coverage, you need to find replacement insurance as soon as possible -- preferably before the existing coverage lapses and the lender puts lender-placed insurance in force. You have the right to replace the force-placed policy at any time and only pay for the time the coverage was in effect. If you experience any problems with your lender and lender-placed insurance, contact your state insurance commissioner for assistance.
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