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Regulators are cracking down on forced homeowners insurance

Federal regulators with the Federal Housing Finance Agency say that they are cracking down on something called forced-place insurance, which are policies that banks force struggling homeowners to take out during the foreclosure process to secure the property against damage. Some states have already taken action against this type of policy, which is purchased by the bank and then billed to the homeowner.

Essentially, banks and insurance companies work together to select and purchase a policy for the struggling homeowner and then the bank takes out the policy and bills the homeowner for the costs. Experts say that some of these arrangements between banks and insurance companies "resemble simple kickbacks" while other have more complex financial structuring that benefits the companies but not the policy holder.

The crackdown by regulators will require banks to "trim" the practice slightly and purchase plans with lower, more reasonable rates.

Insurers owe their customers the duty of good faith and fair dealing, which means that they cannot be dishonest, misleading, or deny a claim without proper cause. In these cases, banks that either own or receive some sort of commission from insurers for these policies may be operating in bad faith, forcing homeowners into policies that are too expensive for the coverage they offer.

Insurance companies, for their part, are also responsible for some of the potential wrongdoing here. Particularly their deal with the banks to provide coverage at a high premium and to pay commissions demonstrates that the insurance companies may not be dealing fairly with the homeowner who is actually paying the bill.

Source: Bloomberg, "FHFA's Home Insurance 'Crackdown' Is Late to the Game," Karen Weise, March 26, 2013.

Information about insurance policies in Florida can be found on our Fort Lauderdale lawyer site.

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