Force-placed policies can limit homeowner recovery

All mortgages require the borrower to maintain a homeowner’s insurance policy on their home. Lenders, most often banks, have a lot at stake and understandably want to protect themselves by requiring the homeowner to purchase adequate insurance.

However, lenders can also take on a more active role, by purchasing insurance on the home itself in situations where the homeowner either fails to procure insurance, fails to adequately insure the home, or allows the homeowner’s policy to lapse or expire.

In these situations, the lender will buy insurance on the property independently, often at a much higher rate. When a lender does this, it is called “force-placed” or “lender-placed” insurance.

Force-placed is probably a more accurate description because while a lender may purchase the insurance, the borrower is the one left with the bill. Furthermore, force-placed insurance is almost always procured at much higher rates than typical homeowner’s policies and almost always serve to protect the financial interests of the lender exclusively.

In a force-placed policy, the lender is typically the only named insured. This can and often does limit a homeowner’s right to recover when an insurer denies a claim or acts in bad faith.

In one recent case, Joseph v. Praetorian Ins. Co., 2018 U.S. Dist. LEXIS 27731 (S.D. Fla. Feb. 20, 2018), a district court in Florida found that a homeowner did not have the right to sue for breach of contract against the force-placed insurer because her lender was the only named insured on the policy.

The force-placed homeowner’s policy explicitly stated that the contract was between the insurance company and the lender. It further explicitly stated that, “[t]here is no contract of insurance between the BORROWER and Praetorian Insurance Company.”

Praetorian moved to dismiss the lawsuit arguing that the homeowner had no standing (in other words, no legal right to sue) because she was not named and was in fact explicitly excluded under the policy.

The court looked toward whether the homeowner had an insurable interest as defined under Florida Statutes section 627.405, which states:

(1) No contract of insurance of property or of any interest in property or arising from property shall be enforceable as to the insurance except for the benefit of persons having an insurable interest in the things insured as at the time of the loss.
(2) "Insurable interest" as used in this section means any actual, lawful, and substantial economic interest in the safety or preservation of the subject of the insurance free from loss, destruction, or pecuniary damage or impairment.
(3) The measure of an insurable interest in property is the extent to which the insured might be damnified by loss, injury, or impairment thereof.

Under this language, there is little doubt the homeowner had an insurable interest in her home. However, there existed a conflict between that insurable interest and the explicit policy language excluding her from protection. Furthermore, under Florida law, merely possessing an insurable interest in something does not automatically grant standing to sue.

The court here also found that because the language in the policy limited itself to the named insured (the Bank) only and excluded the homeowner, she also could not sue as a third-party beneficiary under the insurance policy.

Finally, the court noted that even if the homeowner were allowed to sue, any recovery to be had would go to the lender.

This case demonstrates why it is important to maintain adequate homeowner’s insurance as well as to ensure that your policy does not lapse or expire.

At Kerr & Wagstaffe LLP, our attorneys specialize in insurance policyholder rights. To learn more about the attorneys and their insurance practice, please explore the links at the top of this page.