FORCE-PLACED INSURANCE

FORCE-PLACED INSURANCE

QUESTION: Can an HOA use force-placed insurance? Force-placed insurance is when the banks buy an insurance policy for homeowners to protect the bank's investment. I'm wondering if an HOA can do the same thing if owners fail to insure their units? The HOA needs a way to protect itself.

ANSWER: Banks are able to “force-place” insurance because of two important conditions: (i) the loan agreement gives the lender authority to do so and (ii) banks has an insurable interest in the property because the home is collateral for the loan.

No Authority to Purchase. Unless an association's governing documents grant authority, boards cannot purchase insurance for an owner and charge back the premium to the homeowner. Even if the governing documents allow it, the association does not have an ownership interest in the unit. Without an insurable interest, it's unlikely a carrier would sell them a policy.

Administrative Nightmare. Assuming an association could purchase individual policies for owners, it creates an administrative problem for the association. To purchase insurance for owners who fail or refuse to purchase their own insurance, the board would have to monitor every owner's insurance. If there are 100 units in the development, there are 100 different insurance policies to monitor with 100 separate expiration dates to calendar and track. Since homeowners could let their coverage lapse at any time during the policy term by simply missing one or more monthly installments, the board would need to monitor their insurance daily and immediately purchase coverage for the owner when it lapsed. 

Expensive. Because force-placed insurance is very expensive, the homeowner has incentive to buy his own insurance as soon as the costly back-billed premiums hit. This creates yet another task for the person monitoring the insurance. Once the homeowner buys his own insurance, the force-placed coverage must be immediately removed and any unused premiums refunded to the homeowner. Forced-place insurance is so complex that even lenders don’t administer their own programs; they rely on third-parties to oversee them.

RECOMMENDATION: Instead of force-placed insurance, associations should consider amending their governing documents to require owners to carry insurance. To protect the association from administrative headaches and potential liability, the amendment needs to exempt the association from the duty of monitoring the provision.