How Having The Wrong Kind Of Insurance Policy Could Put You Into Foreclosure

If you have a mortgage on your home, almost every lender will require that you insure the property. Many people are already aware of this. However, what you may not be aware of, is that you could be treated as uninsured by your lender, and possibly foreclosed upon, even if you are actually insured.

Different Kinds of Homeowners Insurance Policies

To understand how this can happen, you need to understand the different types of policies that insure people’s homes.

In an actual cash value policy, your insurance company will pay you the actual value of whatever is damaged on your property. Here’s the problem with that: an actual cash value policy doesn’t account for depreciation. That means that if your roof is 15 years old, and it is damaged, the insurance company will pay you the value of your 15-year old roof.

The problem is that you need a brand new roof, which is considerably more expensive than the 15-year old roof you just lost, and which the insurance company paid you for.

The end result is that your insurance company is not legally obligated to pay you what you need to actually replace your roof (or whatever other part of your home that is damaged).

Compare this to a policy that pays the replacement cost of whatever needs replacement. A replacement cost policy is much better for the homeowner, because the homeowner is guaranteed that the policy will pay whatever it costs to replace whatever is damaged.

Problems With Cash Value Policies

There are two problems at work when it comes to actual cash value policies.

The first is that insurers are still allowed to sell, and often do sell, actual cash value policies. Many homeowners opt for these policies, not understanding that they are not fully insured, and because the policies are more affordable. Given how expensive homes have become, it’s no wonder that homeowners would want to minimize the costs of home ownership as much as possible with these kinds of policies.

But there is another, hidden danger when it comes to your mortgage: Most mortgages will require that you have a replacement cost value policy. If you do not, and you have the cheaper actual cash value policy the mortgage company may treat you as uninsured, and impose on your forced placed insurance, just as they would if you had no insurance at all.

The cost of your home (your mortgage payment, with the insurance payment within it) has now gone up significantly, as forced placed insurance is almost always more expensive than a privately obtained policy, and will definitely be more expensive than your (admittedly insufficient) actual cash value policy. Some homeowners may be driven into foreclosure, unable to pay the high forced placed insurance rates.

Before you get homeowners insurance, make sure to ask what kind of replacement the policy covers, and what kind of policy your mortgage may recover. Otherwise, you could have serious problems, not just with home repairs, but with your mortgage company and with the cost of your home.

Contact the Miami property damage insurance claims attorneys at Velasquez & Associates P.A. today to help you if you are having problems with your homeowners insurance company.

Sources:

dfs.ny.gov/consumers/help_for_homeowners/insurance/force-placed_insurance#:~:text=Force%2Dplaced%20insurance%2C%20also%20known,does%20not%20secure%20a%20replacement

amfam.com/resources/articles/understanding-insurance/replacement-cost-vs-actual-cash-value#:~:text=After%20a%20loss%2C%20actual%20cash,as%20age%2C%20condition%20and%20obsolescence