One of the most frustrating parts of my job as an insurance recovery lawyer is hearing from homeowners who were “dropped” (i.e., non-renewed) by their big-box insurers, like State Farm, just months or even weeks before a disaster. After the Palisades and Eaton fires, I’ve spoken to homeowners who decided to forego insurance when they found out they would be unable to afford California FAIR Plan following their non-renewals, which occurred just before the devasting wildfires. Instead of securing proper coverage, many ended up with force-placed insurance—a policy forced on them by their mortgage lender.
What Is Force-Placed Insurance?
Many force-placed insurance policies do not act like typical homeowners insurance. With a few exceptions, forced-placed policies only protect the lender’s financial interest, not the homeowner. They typically do not cover personal belongings, loss of use (temporary housing), or liability.
The exception to this is when a bank secures a policy wherein the policyholder is named as additional insured, also known as voluntary force-placed insurance. In that case, the borrower can benefit from the coverage, including the option to rebuild after a loss. These policies are more common for properties in high-risk disaster areas or can be required depending on the type of loan that is held. However, whether the borrower is current or delinquent on their loan affects how these policies apply. If the borrower is delinquent, the lender may limit the payout or direct funds to settle outstanding debt rather than rebuilding.
Traditional force-placed insurance is usually two to three times more expensive than standard homeowners insurance. Many homeowners assume that a higher price means better coverage, but that’s a costly mistake. The extra cost comes from lender markups and lack of competition, not better protection.
Higher Price, Less Coverage
Force-placed insurance only covers the mortgage balance. With few exceptions, if your home is damaged or destroyed, the payout goes directly to the lender—not to the property owner. Combined with maximum policy limits totaling the mortgagor’s debt, this means no money to rebuild completely and no money to replace belongings or cover living expenses. Homeowners who thought they had coverage find out too late that they have no financial safety net. This exact scenario has played out for many after the recent California wildfires. Some homeowners assumed they were covered, only to find out their force-placed policy left them with nothing. In contrast, a California FAIR Plan policy, while imperfect, at least provides structure coverage and allows homeowners to supplement with additional policies.
Neither Attorneys nor Public Adjusters Can Help with Force-Placed Policies
Homeowners who try to seek help from an attorney or public adjuster after a disaster often run into another frustrating reality: Neither can represent them if they only had traditional force-placed insurance on the property, but a public adjuster can represent the mortgagee. The reason is simple—the homeowner is not the policyholder, with the exception of voluntary force-placed policies. Force-placed insurance is purchased by the mortgage lender to protect their financial interest in the property, meaning the lender is the only named insured. Since the policy’s payout goes directly to the mortgage company and does not cover the homeowner’s belongings, living expenses, or liability, there is nothing for an attorney or public adjuster to negotiate. Public adjusters specifically represent policyholders, and in this case, the homeowner has no insurable interest. Without a valid homeowner’s policy in their name, legal options are severely limited, leaving the homeowner with little recourse after a disaster.
Protect Yourself Before Disaster Strikes
The key takeaway: Force-placed insurance is not actual coverage for homeowners. If your insurer drops you, explore every possible option, including the FAIR Plan or even surplus lines carriers. If you already have a force-placed policy, you may be able to secure your own insurance and have the lender remove the forced coverage. It’s critical to understand your rights before you’re left with no protection when you need it most.
The aftermath of a wildfire is devastating enough. Don’t let bad insurance decisions make it worse.
