Does your bank charge you extra on your monthly car or mortgage loan payments for insurance that the bank bought? Do you even know if it’s happening?

Most people insure their homes and cars, but banks sometimes buy an additional policy without asking the owner, adding the costs to the monthly car or home loan payment.

Sometimes the charge is legit, and sometimes it’s not. Homeowners in or near flood zones may be especially at risk of having overpriced and unnecessary insurance policies forced on them. Homeowners who pay their own insurance through an escrow account directly to the bank may also be at extra risk.

If your monthly car or home payment was increased by the bank for excess property insurance, read on.

 And if what’s described below happened to you, we’d like to hear from you at our consumer complaints page.

In theory, lenders only purchase insurance on your property if you fail to buy any or enough coverage for the home or car or if your insurance lapses for some reason.  And, in theory, it’s a reasonable enough action to guard the value of properties for which banks make loans. In practice, however, it can be a scam of outrageous proportions (as consumer columnist Dave Lieber recently wrote in the Fort Worth Star-Telegram).

We’ve seen some complaints recently, for example, about people with SunTrust Bank mortgages who are forced to pay for excess coverage, including flood insurance they don’t need.

Here’s how it works:

Mortgage lenders and banks require that homeowners and drivers carry insurance for their home or car in order to get a loan, so if there's damage to the property, the insurance will cover the cost of repair or replacement. If your insurance on the property lapses or is determined to be insufficient, the bank can go out and buy insurance for the property and charge it to you through your loan, without asking your permission. This is called “force-placed” insurance. The bank has a right to do this but some banks are going too far.

We’ve heard about schemes in which lenders buy very expensive and excessive insurance on a homeowner's property and then charge it to the customer. The bank sometimes gets a kickback from the insurer for placing the coverage.  What takes the practice to rip-off level is that the coverage is often superfluous because the homeowner already has enough insurance. 

A typical scenario involves a family living in or near a flood zone.  They have a homeowners policy with a major insurance company, and a separate National Flood Insurance Program flood policy. Then, out of the blue, the family gets  a notice from the mortgage company that they need to buy more insurance. Next, before anyone at the bank has managed to explain why the increase is necessary, they’ll see a large increase in their monthly mortgage payment for additional—and unnecessary–homeowners insurance and more flood insurance.

In some cases, the bank-ordered insurance is backdated, so the homeowner or driver must pay for flood insurance or, in another scenario, hurricane coverage for several prior months even though there were no floods or hurricanes during those months.

Customers who make their insurance payments through an escrow account controlled by the bank may fall victim to another trick. The bank misses a payment to your insurance company, and your insurance is cancelled. Then the bank goes out to its own insurer and “force places” you into that much more expensive policy.

Insurance companies and banks both benefit from this scam.

Insurance companies win because they sell these policies at very high premiums. My colleague at the Center for Economic Justice, Birny Birnbaum, told a Congressional Committee (pdf) this summer that insurers sold about $5.5 billion worth of force-placed insurance in 2010 almost quadrupling what was sold in 2004. They often are providing coverage that is totally unnecessary, and for which they’ll never have to pay a claim because the original coverage was sufficient. It’s like getting paid to mow the lawn of someone who lives in an apartment. 

Banks win because the force placed insurance often comes with a kickback from these expensive insurers, many of which are considered “non-standard,” based overseas or otherwise less regulated than mainstream insurers.  Sometimes, we believe, the banks win not by getting kickbacks but by force placing overpriced insurance with their own affiliate insurance companies.

Customers lose because they are buying coverage that they don’t need at a premium that is excessive, even if they did need it.

If, after reading all this, you think you’ve been charged for home or auto insurance you don’t need and shouldn’t have to pay for, please contact us at our complaint page or send us an email at [email protected].