Just as mortgage lenders can force homeowners to carry coverage against loss of a house, auto lenders can and do institute "forced place" insurance when borrowers fail to maintain insurance for a car financed by a loan. Forced-place car insurance is similar to the more familiar forced-place home insurance, including higher costs and limited coverage.
Documents for car loans routinely require borrowers to maintain comprehensive and collision coverage -- types of coverage not required by law -- and include clauses allowing lenders to impose forced-place insurance. This means that if a borrower lets his car insurance lapse by not paying the premiums, the lender can and usually will buy a policy covering the vehicle. However, the borrower must pay the forced-place premiums.
Costly and complex
Forced-place insurance is usually far more expensive than coverage purchased under normal circumstances.
“It’s not at all unusual for it to be five times more,” says Robert Hunter, director of insurance at the Consumer Federation of America, a nonprofit advocacy group.
If traditional coverage costs $795 a year, forced-place car insurance could cost nearly $4,000 a year, based on Hunter's estimate.
Lender-placed insurance won’t include liability coverage, which is required in 49 states, according to Loretta Worters, a spokeswoman for the nonprofit Insurance Information Institute. That means you could have your license suspended for driving without insurance, even while paying far higher insurance premiums, and you wouldn't be protected against liability for damage or injury you cause to another person or car.
To make matters worse, you wouldn't necessarily be protected against the loss of your own car. Forced-place insurance typically covers only the amount of the loan -- not the value of the vehicle. Some types of this insurance, called vendor single-interest coverage, protect only the lender. Add it up, and force-placed insurance is a bad deal for drivers.
'Forced place' scrutiny
Despite the obvious concerns for consumers, forced-place insurance for cars hasn’t produced the same level of controversy and concern as forced-place insurance for homes. That’s partly because the dollar amounts involved in forced-place home insurance are much higher than for forced-place car insurance, Hunter says.
Still, many of the same concerns that have drawn scrutiny regarding forced-place home insurance apply to force-placed car insurance. Pricing is a major issue. Insurance companies say the higher premiums are necessary because coverage is extended to whoever a lender says must have it.
“Motorists should be aware that a lender-placed auto insurance policy will usually cost more than other policies, because the insurance company has agreed to cover a number of lapsed drivers, at the request of the bank, with no individual screening -- which means higher risk for the insurer,” says Robert Byrd, a spokesman for Assurant Specialty Property, which sells forced-place insurance.
Hunter, however, doubts that premiums are higher as a result of these drivers filing more claims. He notes that providers of force-placed mortgage insurance use a similar rational to justify the high prices for this coverage. Hunter says a review showed that insurance losses for forced-place houses were slightly higher than for traditionally insured houses -- less than 5 percent higher -- but the premiums were about five times higher.
Commissions and kickbacks
Force-placed insurance costs more, Hunter says, because lenders get commissions of up to 30 percent for placing the policies, compared with the usual 10 percent commission for normal car insurance policies.
Insurers also offer incentives such as kickbacks and free or discounted services like loan tracking to lenders that agree to sell their forced-place products, according to Hunter says.
Avoiding forced-place insurance
To avoid being forced to buy car insurance, drivers should make sure their coverage is paid up at all times. Don’t assume that if you haven’t received a renewal notice from your agent that all is well. Drivers must monitor due dates for payments and should inform lenders when they switch car insurers.
If a lender tries to force coverage when a driver has his own policy in effect, the borrower should contact the lender and, if necessary, state insurance regulators to make sure the mistake is fixed and the borrower is not required to pay for the forced-place policy.
If a driver is slapped with a forced-place insurance policy, he should obtain coverage on his own as soon as possible. A driver can be forced to cover force-placed premiums only for the time that his car is uninsured. “If you had a coverage break of three days, that’s all they can collect from you,” Hunter says.