I have a Lender-Placed Insurance Policy; What Happens to My Homeowners’ Insurance Claim?

Some homeowners may have lender-placed insurance policies, also known as “creditor-placed” or “forced-placed policies.” These policies occur when there is an insurance policy placed by a bank or mortgage company on a home when the homeowners’ insurance policy may have lapsed or is deemed insufficient by the bank. Under these lender-placed insurance policies, the bank or mortgage company is the named policyholder and insured. This poses a problem when a loss occurs on the property and the homeowner reports a claim to his or her insurance company.

The case Joseph v. Praetorian Insurance Company,¹ addresses what occurs when a homeowner who has a force-placed policy files an insurance claim for property damage. In the Joseph case, the homeowner, Betty Joseph (“Joseph”), discovered damage to her home as the result of two different leaks. She reported the loss to her insurance company, Praetorian Insurance Company (“Praetorian”), which denied both claims. Joseph sued Praetorian for breach of contract for each of the claims, and the latter moved to dismiss the case, arguing that the policy was a lender-placed policy that listed Bank of America as the named insured and Joseph as a borrower. Thus, Praetorian argued, Joseph did not have standing to bring suit under the policy. The policy contained the following language:

The contract of insurance is only between the NAMED INSURED and Praetorian Insurance Company. There is no contract of insurance between the BORROWER and Praetorian Insurance Company. The insurance purchased is intended for the benefit and protection of the NAMED INSURED, insures against LOSS only to the dwelling and OTHER STRUCTURES on the DESCRIBED LOCATION, and may not sufficiently protect the BORROWER’S interest in the property. No coverage is provided for contents, personal effects, additional living expense, fair rental value or liability.
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13. LOSS Payment. WE will adjust each LOSS with YOU and will pay YOU. If the amount of LOSS exceeds YOUR insurable interest, the BORROWER may be entitled, as a simple LOSS payee only, to receive payment for any residual amount due for the LOSS, not exceeding the lesser of the applicable Limit of Liability indicated on the NOTICE OF INSURANCE and the BORROWER’S insurable interest in the damaged or destroyed property on the DATE OF LOSS. Other than the potential right to receive such payment, the BORROWER has no rights under this RESIDENTIAL PROPERTY FORM.

The district court dismissed Joseph’s complaint, stating that Joseph’s insurable interest in her home did not create standing to sue on her lender-placed insurance policy. The court also stated that the policy unambiguously did not confer standing to sue on Joseph. The court further added that even if Joseph did have standing, she did not have the right to recover from Praetorian under the homeowners’ insurance policy based on the “loss payment” provision.

Homeowners who have a lender-placed policy should be aware of the difficulty they may encounter when trying to recover from their insurance company for a loss, depending on their jurisdiction and policy language.
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¹ Joseph v. Praetorian Ins. Co., No. 17-61237 (S.D. Fla. Feb. 16, 2018).