Florida tops the nation in force-placed insurance

Article Courtesy of The Sun Sentinel

By Julie Patel

Published July 9, 2012


Florida led the country in its share of force-placed insurance premiums the past three years, including 35 percent, or $1.2 billion, in 2011 more than three times the amount sold in the next-largest state, California.

That's according to sworn testimony provided last month for the United States Judicial Panel on Multidistrict Litigation.

Florida has one of the country's highest numbers of foreclosures, and most people stop paying insurance premiums when they default on mortgage payments. That means a lot of policies are imposed on consumers without coverage.

Force-placed insurance protects lenders against possible losses on property they've loaned money for, Florida Insurance Commissioner Kevin McCarty said.

But the coverage has drawn scrutiny from him and federal regulators because the prices often are much higher than policies sold directly to consumers. Many force-placed policies are sold by insurers with unregulated rates or with agreements to provide lucrative commissions or other perks to companies that manage consumers' loans and impose the insurance a potential conflict of interest, according to consumer advocates.

"That's something that needs to be investigated," McCarty said Friday.

McCarty said he expects to hold a rate hearing after American Security, one of the state's two largest lender-placed insurers, proposes rates later this year. He said Balboa Insurance, the other large company, reduced rates by 15 percent in 2010, lowering premiums by $250 million, in response to an order from his office.

"We're taking care of business," he said. As president of the National Association of Insurance Commissioners, McCarty also has ordered a hearing next month in Atlanta on force-placed coverage. 

Problems with force-placed coverage are exacerbating the mortgage meltdown, experts say. Lenders or companies that manage the loans profit while the borrower either pays the bill or goes into foreclosure and leaves entities that own the loans to pay the premiums. The biggest loan owners are taxpayer-backed Fannie Mae, Freddie Mac and the Federal Housing Administration; they hold about 90 percent of all new residential loans.

Fannie Mae issued new rules intended to reduce rates, and is shopping for an insurer that could provide all of its force-placed coverage at a cheaper rate, according to spokesman Andrew Wilson. 

Insurers and mortgage managers say force-placed policies are imposed after customers fail to show proof of coverage, and the customers can replace the forced coverage with other insurance at any point. In addition, imposed coverage can cost more, because the insurers must accept all risks, and they can't provide discounts because they don't evaluate individual homes' risk when calculating prices.

The policies should cost less because they typically exclude coverage offered by most homeowners and the insurers don't have to pay agent commissions and advertising or customer service costs to attract and keep policies, said David "Birny" Birnbaum, a former insurance regulator in Texas who is now an economist and consumer advocate with the Center for Economic Justice in Texas. Birnbaum provided the testimony on Florida and other states' shares of force-placed insurance policies, calculating the numbers using thousands of records from the National Association of Insurance Commissioners. 

"Some of these charges are so outrageous that they push people into default and foreclosure," Birnbaum said.

Just how much are South Floridians paying?

Lord Toussaint said he's being charged a whopping $90,000 a year for coverage that used to cost $5,600 for his home in Coral Gables.

Toussaint, owner of an electronics business, said he has been trying to get the mortgage servicer to reduce the coverage since he was notified last year of the higher cost.

The problem, he said, is the imposed policy covers the home for $3 million what may be considered the new value of the home since he made major renovations instead of the $560,000 amount of the loan.

Christina Ulbrich, of Fort Lauderdale, was allegedly billed $12,787 and $9,708 for a year of force-placed hazard insurance and windstorm insurance, respectively, when she already had hazard coverage for the same period. Nationwide Insurance had charged her $892, and her mortgage doesn't require windstorm, according to a lawsuit she filed in November in U.S. District Court for the Southern District of Florida. The policies were backdated up to 17 months, and the windstorm policy had expired months before the mortgage company purchased it on her behalf, the suit alleges.

Hilda Sultan, of Davie, was charged $33,199, including a $7,138 commission for an insurance agency that is a subsidiary of her mortgage servicer, according to 2009 court documents in a lawsuit pending against the mortgage company.

She "always maintained appropriate insurance coverage," but the servicer imposed the policy anyway costing her eight times more than the roughly $4,000 it should have cost, according to the suit.

"I had no awareness whatsoever that anything lapsed. I thought it was coming out of my mortgage payment and the escrow [account]. They didn't notify me. I didn't know until I was refinancing my loan ... during my divorce," said Sultan, a full-time mother who said she spends her spare time working on child advocacy legislation. "I felt devastated, absolutely devastated. I was counting on that money for my children's education."

Jeff Golant, an attorney representing borrowers in about 20 lawsuits over force-placed coverage, including Sultan's, said even when companies provide notice, it doesn't give them the right "to rip people off."

State set to grill insurers on force-placed policies