Philadelphia Weekly

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Miscommunication between insurer, lender leaves homeowner with overpriced coverage

Benny Kass
Inman News®

DEAR BENNY: My wife and I closed on a short-sale house in Florida back in 2010. We paid "in full" the homeowners and flood insurance even before we took title to the property. Once we became the owner of the property, confusion started when the insurance agent apparently (and incorrectly) advised the lender that we did not have the necessary insurance coverage.

As a result, the lender advised us that it force-placed an insurance policy at a premium cost that was considerably higher than what normal insurance costs.

We are trying to resolve this amicably, but may have to file suit if it can't be resolved. --George

DEAR GEORGE: First, when dealing with national lenders (such as the one you have) I have often found that a letter to the Office of the Comptroller of the Currency assists in getting the lender to be more responsive.

I am not sure how I can respond to your situation, as you may choose to file a lawsuit to resolve your issues. You may have a good case against the insurance agent for negligence, but your lawyer will have to make that decision.

However, I wanted to use your issue to discuss "force-placed" insurance.

Oversimplified, every mortgage lender requires its borrowers to maintain hazard insurance. If, for example, the property burns down -- or is hit with a tornado -- the lender wants to make sure that the insurance coverage will pay off the existing loan.

There is an interesting issue as to the amount of coverage that lenders can legally require. For example, if your home is worth $500,000 but your loan is only $250,000, one would think that all you need to satisfy the lender is $250,000 (although that may be a long-run foolish decision should your house burn down).

Apparently, different states have different legal requirements, so discuss this issue with your attorney. However, at the very least, you need full replacement insurance coverage.

Back to force-placed coverage: If you do not continue to carry your own hazard insurance, your lender will obtain it for you -- i.e., it will "force" insurance on your home at your expense. And, be warned: The cost of this coverage will be considerably more expensive than if you purchased it on the open market.

There are many abuses by lenders in this area. In fact, I have just learned that agencies in New York state have started investigating companies that underwrite and sell forced-place insurance.

Bottom line: Make absolutely sure that you do not let your home (hazard) insurance lapse.

DEAR BENNY: My mother is 89 and has been in a nursing home for almost five years. I am contributing to the cost of her care. I have two questions:

• How do I transfer the title at her death? I have her old will done in the 1960s naming me as the heir.
• Can the money that I have contributed over the years be deducted from the sale of her house?

This is the only asset she has. --Ruth

DEAR RUTH: Let me answer your second question first. You are still not the owner of the property and accordingly, you cannot take any deductions for the moneys you spent -- even if they significantly improved the house.

If the house were sold to a third party, you would be able to recover some of your investments. There is a statute of limitations in your state that would limit how far back you can claim reimbursement. You will also need adequate proof such as receipts and invoices.