Nobody questions the right of a bank that holds a mortgage or auto loan to require a borrower to buy homeowners' or auto insurance. After all, your property is the bank's security. Selling it is what will repay the loan if you default, and a burned-down house or smashed-up car isn't worth much.
But what if a lender believes - even mistakenly - that your casualty insurance has lapsed? That's what happened recently to Philadelphia author and editor Dan Rottenberg. As Rottenberg learned, it can be a costly mistake.
Rottenberg's story is a window into a little-known corner of the insurance business known as "forced placement," in which lenders buy policies for borrowers at premiums that can drastically inflate the price of insurance.
Forced placement is drawing new scrutiny because of the nation's wave of foreclosures. Critics say lenders, servicers, and insurers are enriching themselves at the expense of homeowners and mortgage investors - indirect victims because insurance premiums typically get priority when a foreclosed property is sold.
I'll explain more about that in a moment - after I tell you how Rottenberg got involved with forced-placement insurance even though he doesn't have a mortgage anymore.
Rottenberg and his wife, Barbara, paid off their Center City townhouse a decade ago. But for many years they've had a home-equity line of credit from Wachovia Bank or one of its predecessors. They used it to help put their two now-adult daughters through college, and have kept it open without paying much attention.
Each year, Travelers Insurance presumably notified Wachovia or its predecessor that the Rottenbergs had renewed their homeowners' insurance. But this year, it seems, something went wrong.
Rottenberg, a former Inquirer contributor who now runs an arts-and-culture website called www.BroadStreetReview.com, didn't realize it immediately. Wachovia isn't his main bank, so he isn't used to seeing statements from it, let alone getting mail from its new owner, Wells Fargo & Co. So when Rottenberg saw a letter from Wells Fargo mentioning homeowners' insurance, he assumed it was junk.
The second time, Rottenberg read more closely. The letter said Wells Fargo had purchased a policy on his behalf from QBE Insurance Corp. Unless he could prove he had coverage otherwise, his premium would be $4,775 - more than three times his annual premium with Travelers.
For Rottenberg, this story was largely just a hassle. After calling Wells Fargo, he was able to determine what had gone wrong. The letter - signed only by Wells' "Insurance Department" - gave him 90 days to prove that he had continuous insurance, and a call to his agent solved the problem.
But Rottenberg wondered what might have happened if he'd overlooked the second letter, too. He was especially disturbed by the warning that "if you do nothing, they're just going to charge you."
"I think it's clear that somebody thought this was 'an opportunity for our insurance department,' " he says.
Neither Wells Fargo nor QBE would comment on the financial arrangements between them, although a Wells Fargo spokesman noted that the bank's letter says, "An affiliate of Wells Fargo Bank may receive a commission for the placement of the insurance."
Both the letter and Wells Fargo's spokesman, Jim Baum, cite a common industry justification for outsized forced-placement premiums: "Since insurance purchased by Wells Fargo Bank insures your property without inspection, the cost may be substantially higher than the cost of insurance that you can obtain through your own agent," the letter says.
But critics say the premiums are far out of line with the added risk - especially for insurance, such as the QBE policy purchased for Rottenberg, that doesn't include protection for a home's contents or liability coverage, both part of a typical homeowners' policy.
"The problem is that these lenders have set up sweetheart deals with insurance companies and get all sorts of kickbacks, so that the price doubles, triples, or quadruples. In fact, it's not unusual for it to go up five or 10 times," says J. Robert Hunter of the Consumer Federation of America.
Hunter says insurers do face added risk if they offer such policies without the usual underwriting. It's possible, for instance, that a homeowner facing foreclosure might neglect repairs and expose a home to additional damage. But he says the added risk might justify a premium 10 or 20 percent higher, not 200 to 1,000 percent.
"I've had insurers tell me, 'We can't compete - our rates are too low, and we can't kick back enough money [to the mortgage lender],' " says Hunter, a former Texas insurance commissioner.
Although forced-placement policies often affect homeowners who are already in distress, they can sometimes trigger a homeowner's problems, says Diane E. Thompson, a lawyer at the National Consumer Law Center.
Thompson handled a case in Maine in which a forced-placement policy cost $8,500 - more than 16 times the homeowner's regular annual premium of $520. And she says some homeowners find it more difficult than Rottenberg did to cancel a forced-placement policy - even when they, too, got the coverage because of a lender's mistake.
Failing to do so can lead to even worse headaches. Thompson says one client simply gave up, kept the forced-placement policy, and quit paying premiums for her original insurance. Only after the client suffered a loss did she realize that the forced-placement policy covered just her home, not its contents.
The lesson of Rottenberg's story? Watch your mail closely - and don't let your own policy lapse. If your lender buys coverage, it may bite.