Lender-placed insurance? We answer your most common questions.

February 16, 2022

If you don’t buy homeowner’s insurance, we may have to buy it for you—which will be much more expensive. Here’s how to avoid that.

Getting a mortgage loan means taking on several legal obligations—one of which is your responsibility to buy and maintain homeowner’s insurance. If your mortgage has an escrow account, it’s pretty easy to do that. Why? Because your insurance costs are part of your regular mortgage payment; and—as your loan servicer—we pay those bills for you. But if you don’t have an escrow account, you pay your insurance bills yourself.

So what happens if you don’t pay your bill and your insurance company cancels your policy? Or what if the value of your home increases to where your policy can’t pay enough to repair or rebuild after a fire, storm, or other disasters?

That’s where lender-placed insurance comes in.

Lender-placed insurance (LPI) is property insurance that we buy on your lender’s behalf if we need to: that is, if your homeowner’s policy lapses or is canceled—or if you don’t have enough coverage. Then we bill you for the cost, which is much more expensive than any policy you can buy on your own.

How can you avoid LPI? Read on to learn more—and for answers to the LPI questions, people ask most often.

Why do I need homeowner’s insurance?

First, to fulfill your legal obligation. When you buy a house, your mortgage agreement requires you to buy and maintain insurance on your property.

Second, to protect your home, your family, and your possessions. Let’s say that your home is insured and it gets damaged or destroyed—for example, by a fire or a tornado. If that happens, your homeowner’s policy protects the investment that both you and your lender have made in your home. It does that by paying to replace your lost possessions and make repairs—or rebuild.

But what if your home is not insured and it gets heavily damaged or destroyed? You probably won’t have enough cash on hand to replace all of your belongings—much less to repair or rebuild your home. If that happens, both you and your lender will lose everything you’ve invested in the property. That’s why it’s so important that your property always be protected by homeowner’s insurance (sometimes called “hazard” insurance).

What is LPI?

LPI is sometimes called creditor-placed, force-placed, or collateral-protection insurance. It’s a policy that we buy and you pay for; it covers your property on behalf of your lender. You need to know that we buy LPI only when we’re forced to. That is if you don’t renew or replace your homeowners' insurance policy after it lapses, gets canceled, or doesn’t have enough coverage. Other reasons we may buy LPI are that we simply have no evidence that you have a current policy—or we can’t verify that your policy provides coverage during a certain time period.

Also, if your home is in a FEMA-certified flood zone, you must buy flood insurance. But what if you don’t have flood insurance? Or what if you don’t have enough to meet the legal minimum amount needed to protect your home? In those cases, your lender may require us to buy flood insurance for your property.

This kind of insurance is called “lender-placed” because your lender has us put it in place for you. Also, LPI protects only your lender against property damage and loss; it does not cover your possessions or any kind of liability (for example, if your neighbor falls in your yard and sues you to pay for expensive medical treatment).

LPI can come at a much higher cost than homeowner’s insurance you buy on your own. One of the reasons it’s so expensive is because it takes on very high risk by insuring property without an inspection—and without researching the property’s loss history.

What does the law say about LPI?

Federal law says that we can’t charge you for LPI unless we have good reason to believe that you’re not complying with the requirement in your mortgage agreement to keep your property fully insured. The law also requires us to notify you in writing before we buy LPI to cover your property.

How will you notify me before you buy LPI?

It’s very important that you buy and maintain homeowner’s insurance yourself. It’s also important that we have a copy of your current policy on file. So if you don’t buy insurance—or if we don’t have a copy of your valid policy on file—we’ll buy LPI for your property. Federal law requires us to give you at least 45 days’ advance notice. We’ll use U.S. Postal Service first-class mail to send you at least two letters that remind you of your obligation:

• First letter. We mail your first letter 45 days before we buy LPI. The letter tells you we have no evidence that you’re maintaining a valid homeowner’s policy (in other words, we don’t have a copy of any policy you may have purchased). The letter asks you to provide us with proof that you’ve bought insurance (if you actually have) and tells you how to do that. The letter also describes the type of insurance we plan to buy. Finally, the letter warns you that LPI costs much more than insurance you buy yourself—but it won’t provide as much coverage.
• Second letter. What if you don’t send us valid proof of insurance after you get our first letter? We mail you a second letter 15 days before we charge your mortgage account with the cost of LPI. That letter tells you either the annual LPI policy cost or a reasonable estimate. The letter also reminds you how to provide us with evidence of any valid homeowner’s insurance that you’ve bought.

What can I do if you charge me for LPI?

There’s only one way to get out of LPI: Send us proof of whatever homeowner’s insurance policy you’ve purchased. But what if you believe we made a mistake by buying LPI when you already had your own policy in place? You must keep on making your LPI payments until the situation is resolved. As expensive as it may be to pay for LPI, you must do it—and do it on time. If you don’t make your LPI payments, we may have no choice but to foreclose on your property. All of this is explained in detail in your mortgage agreement.

As soon as you find out about problems with your homeowner’s coverage, call your insurance company. If they canceled your policy, either buy a new one or have your old one reinstated. After you pay for your new or reinstated policy, follow the instructions in the letters we mailed you. Send us a copy of the policy and proof of your payment (such as a receipt from your insurance company). Ask us in writing to cancel the LPI policy.

Within 15 days after we receive your valid proof of insurance and your letter asking us to cancel the LPI, we’ll cancel it. We’ll also refund all LPI-related expenses we charged you during any time when the insurance you bought overlapped with the LPI. Note: If your policy doesn’t cover the entire amount of time covered by the LPI, we may give you only a partial refund.

Finally, if you disagree with anything we’ve done related to your insurance—or if you believe your insurance company canceled your policy because we didn’t pay it on time from your escrow account—mail us a “notice of error” (a letter that explains the situation in detail). We’ll look into it right away and do everything we can to set things right.

How can I find affordable homeowner’s insurance?

If you need to buy homeowner’s insurance, here are some guidelines that can save you money. Your insurance agent can help you make the necessary calculations:

• Determine how much coverage you need. Your “dwelling” coverage should be equal to what it would cost to rebuild your home. Also, be sure you have enough liability insurance to cover what you might have to pay if someone files a lawsuit against you. Finally, determine the amount of coverage you need to replace your possessions.
• Choose a higher deductible. You can reduce your overall insurance costs by selecting a higher deductible (the amount you pay, which your insurance company will deduct from any claims settlement). A higher deductible can make your policy more affordable—as long as you don’t file a claim. Then you’ll have to pay more out-of-pocket than if your deductible were lower.
• Compare several quotes. After you know your coverage and deductible amounts, shop around. Find the best price by comparing quotes from at least three insurance companies. The price for the same coverage can differ by hundreds of dollars a year from company to company.
• Ask for discounts. Be sure to request every discount you qualify for, such as for:
  • Buying home and auto policies from the same company.
  • Installing a home security system.
  • Upgrading your roof—or your plumbing or electrical systems.
  • Paying your entire annual bill in full.

You can avoid LPI

If you maintain an active homeowner’s insurance policy, you should never have to worry about LPI. So as soon as you learn about any problems with your coverage—especially if you get letters from us—don’t wait! Act quickly, and we’ll help you avoid the hassle and expense of lender-placed insurance.