If you’re unfamiliar with forced-place insurance, you’d be one of many. In fact, I had to do a bit of research myself.

Forced-place insurance – a.k.a. creditor-placed, lender-placed, collateral protection – is an insurance policy that is taken out by a bank or a lender and put on a piece of property when the property owner lacks sufficient coverage or any coverage at all.  The basic function of forced-placed insurance is so the lender has it’s investment covered in case of disaster or property damage.

The main issue with this type of insurance policy is not only that it is forced, hence the name, but that the rate for the policy can be higher than a normal insurance policy. On top of that, you could also end up paying service or administrative fees to the lender since they’re the ones who acquired the policy in the first place.

This isn’t even the end of the list of why these type of insurance policies are aggravating…

Sometimes, the lender, which could include a bank or mortgage company, has a prior agreement with an insurance company that the lender choose insurance from that specific company instead of shopping around for the cheapest or best suited policy. There’s even allegations that these insurance companies provide kickbacks for the referral.

This situation mirrors a recent set of class action lawsuits against HSBC and American Security Insurance Company that Property Insurance Coverage Law reported on a few days ago.

According to the article, the plaintiffs located in both Colorado and New York, claimed that HSBC had ” …imposed force placed insurance policies with loss limits exceeding the outstanding mortgage balance.

The motion for approval provides a good idea of what the settlement includes reading, “The proposed settlement returns approximately 90% of the commissions that were paid to the HSBC defendants in connection with [forced-placed flood insurance] placed during the class period…”

This bodes well for the victims of such shoddy tactics pulled by companies like HSBC or American Security Insurance Company.

What do you think? Will this settlement deter insurance companies or push them to work around restrictions?