Force Placed Insurance Questions

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Force Placed Insurance Questions

Cindy McHugh
Rural Hall, NC · Member since 2012 · 36 posts · 1 vote

I sold/financed a house in NC in 2011. The buyers never made a payment on time and when they got several payments behind, my attorney sent them a foreclosure notice. They filed for ch 13 bankruptcy.

The DOT states they must maintain insurance on the property or I may obtain it on their behalf. They had a homeowner's policy at closing (required), but it was paid month-by-month and I soon started getting cancellation notices. The easiest way to keep coverage was to just call their agent with my credit card, which I did as needed. I'd then have to fight them for reimbursement (they still owe me for two months premiums).

I'm not comfortable with them having "control" of the policy and the ability to cancel it at anytime, effective immediately. I explained my need for continuous coverage and asked the agent if I could take out a policy on the house myself. Since it's in their name, I cannot (damn my attorney for telling me not to do a contract for deed!). It seems crazy that I have the overwhelming financial interest in the property and I can't protect it.

I just learned of "Force Placed" insurance, whereby a lender can obtain insurance on a property they financed. The woman I spoke with at J.T. Miller said this even includes vandalism for residential units, in the event the people strip or trash the property before they leave (if foreclosed upon). This seemed too good to be true. I said, "sign me up!" She couldn't because I have only two properties financed and their value is less than $500k (minimum for investors). She said she'd try to find a policy to meet my needs, but made no promises.

I had asked if it would be permissible to have a group of investors pool their properties somehow to apply for the insurance together and she said that would enable everyone to qualify, as long as the combined value is at least $500k. She said it would have to be handled through a LLC company. But I don't know the specifics of how it would need to be set up.

I'm wondering if anyone is aware of such an entity that procures this type of insurance for an individual investor. Or, if anyone has any other ideas, I'd welcome hearing them!

As an aside, the folks who filed for bankruptcy advertised the $2000+ water softener system on Craigslist for $400. When I informed my attorney of this, he contacted their attorney and he advised them to remove the ad. I also informed the bankruptcy trustee. I can't believe I have to sit idly by while they destroy the value of the home. I know someone who is willing to buy the home for more than what they owe ($71k) and far more the value they stated it's worth to the bankruptcy court ($65k), but they said they want AT LEAST what they agreed to pay ($88k). It's been 6 months since they've made a payment, yet they seem to have all the rights. It's disgusting.

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Joel OwensBusiness Member
Moderator
Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
13y

Another issue is if the case is dismissed they can refile again and start the automatic stay.

They cannot always refile right away it depends on why the case was dismissed and who dismissed it them or the trustee.

If they filed again in a certain time frame then they are classified as a multiple filer status and generally the stay provision only is good for 30 days. There a thousand different scenarious that affect how a BK plays out.

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  • Jim Lien
    Banker · Kirkwood, MO · Member since 2012 · 7 posts · 0 votes
    13y

    It will probably be difficult, but definitely not impossible to find a force-place insurer. Unfortunately these types of policies are more expensive than normal policies since the occupants are high risk types that are willing to do the things that you were describing! Typically, these insurers work with banks with a larger portfolio of underperforming assets which helps them manage their risk a bit better. If you can't find something then perhaps take a look at http://www.seattlespecialty.com. I don't know much about them, but they appear to specialize in forced place insurance.

    Is there a reason you can't proceed with foreclosure? I know you mentioned the bankruptcy, but when dealing with deeds of trusts or mortgages lenders are typically at the front of the line in being able to collect on their debts rather quickly since they are lending on secured assets.

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  • Cindy McHugh
    OP
    Rural Hall, NC · Member since 2012 · 36 posts · 1 vote
    13y

    Thanks Jim. My insurance agent just called me back and said he's been researching it and found no options for me to insure. This doesn't make sense since I have the most to lose. Thanks for the link to Seattle Specialty. I just spoke with someone there and she's going to have someone contact me about it (fingers crossed). I realize it will be expensive, but I feel that I have no alternative.

    The ch 13 protects them from foreclosure and they don't have to pay a dime while the system reviews the case. (Who comes up with these laws anyway?) I spoke with someone in the trustee's office a couple days ago and she said the proposed payment plan will be out sometime this month and then we have to wait 28 days for objections. If the bankruptcy is not approved, then we can proceed with foreclosure.

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  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    13y

    Cindy in a chapter 13 it sounds like the buyers used an attorney to file instead of "pro se".

    Pro se means the buyers are filing on their own behalf. Usually chapter 13 attorneys will not just file for 13 without good cause that a chapter 13 will get approved for a repayment plan.

    The reason is the filing itself costs 281 dollars with the court and a minimum fee of 75 dollars due upfront and they can set up a payment plan for the rest.
    So the BK attorney makes zero money on the actual filing but money on the plan payments once approved. So if they think a plan will not be approved they will just tell the potential clients to file "pro se" as a stall tactic. The "pro se" approach the filers can get away with more things and play dumb than a BK attorney can.

    After the initial filing there is a "meeting of creditors" usually set 2 to 4 weeks from the time of filing. At that meeting your attorney can object to the filing or try to move for a release of the stay. The trustee usually reviews all the papers and objects or sets up the later conformation hearing.

    Once the plan is approved and confirmed the payments start. The buyers have to pay the BK plan and the mortgage payment both.

    If they do not make the BK plan payment the trustee will file a motion to dismiss the case. If the buyers do not pay the regular mortgage you can file to have the automatic stay release out of the BK for non-payment.

    This is not legal advice but my general understanding of the process. Either way the buyers have protections in place but that doesn't stop you from adding late fees, penalties, attorneys costs etc. to your loan balance if you are afforded that in your finance documents as the lender.

    You just cannot pursue any collection activity while they are in BK.

    Now if they want to approach a short sale with you or DIL or anything else and they initiate it in writing while in BK that is another story.

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  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    13y

    You won't be able to get forced place coverage, as mentioned, the amount is too small and it won't work by pooling because the insured (the lender/seller) needs to have the note or title, if you have ABC LLC as the the insured, the property lien/interest needs to be in ABC LLC as well.

    Next, you should be able to get a policy as the owner in a contract for deed, for non-owner occupied SFDs.

    Next, you can appear at the BK hearing as the creditor, you need to show that the buyer under the CFD has no equitable interest as far as equity beyond any homestead exemption, if they don't have equity that can be distributed to other creditors it will generally be released for you to proceed. The court will have an appraiser, he could look at pics and comps in a few minutes and probably see that there would be no sufficient equity. Good luck!

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  • Rob K.
    Investor · Southeast, MI · Member since 2012 · 2k+ posts · 1k+ votes
    13y

    I have a commercial policy that covers all of my rentals on one policy. I had sold a house on a land contract that I was foreclosing on and the buyer let the insurance lapse, similar to your situation. I was able to get forced place coverage on that commercial policy. I'm not sure if you will be able to do something like this with only one property, but it's worth a try. If you want the name of the company, PM me and I will give you the info.

    Good luck.

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  • William D.
    Member since 2009 · 155 posts · 41 votes
    13y

    You should file a motion for relief from stay ASAP. Let me get this straight, they are not making post-petition mortgage payments and have not paid for their own homeowner's insurance? You are not adequately protected and should not have to wait around for them to propose a confirmable plan. You need to get a bankruptcy attorney. Do you know if you even filed a proof of claim yet?

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  • Cindy McHugh
    OP
    Rural Hall, NC · Member since 2012 · 36 posts · 1 vote
    13y

    Thank you Joel and Bill for all of the information.

    Bill, I have a question regarding, "Next, you should be able to get a policy as the owner in a contract for deed, for non-owner occupied SFDs."

    This wasn't a contract for deed, they have legal title (I approached my RE attorney about doing a land contract and he talked me out of it - lesson learned). Since they have legal title, unless I'm missing something (entirely possible), I don't think I can get a policy as such.

    After spending hours calling every insurance company I could find that offered force placed insurance, I found one that would write me a policy that covers fire, theft, and vandalism. I'm just waiting for the rate. I'll let you know the cost if you'd like. I'm thinking I should be sitting down when I get the figure.

    I'm not familiar with equitable interest, homestead exemption, etc, I remember looking up the figures for NC before any of this happened (JIC), but I'll have to do some more research. Along these lines though, if the house could be sold for $85k and they owe me $70k, wouldn't it make sense for the BK court to order the sale and apply the excess toward other debt? I'm wondering if this is the reason they're trying to devalue the house on paper, but won't actually sell it for the amount they state it's worth.

    Joel - Thank you for the overview of the BK process. I often wondered why any attorney would take a BK case unless they rec'd cash upfront. Now I understand, thanks.

    I was out of the state for the creditor's meeting, but my attorney said there was no reason for me to go. They have not come up with an approved plan yet - I was told that would happen this month - and then creditors have 28 days to object.

    I called the Trustee's office when I learned they were trying to sell the water softener. The woman I spoke with suggested I send the info to the Trustee, which I did. I didn't think to mention it, but in their BK file, they claim to have $2000 in assets. Yet when they advertised the water softener, they stated it's value was $2500. I guess they acknowledged it was not their asset when they filed, yet now they're trying to sell it.

    Another matter I mentioned - don't know if it will be considered - is that I agreed to finance the house for 5 years to allow them to repair credit and build equity so they could refinance with a traditional loan. The balloon payment is due in 3 1/2 years and I don't see them qualifying for a loan with a bankruptcy on their record. So even if the BK is approved and they do make their payments, I'm concerned we're just delaying the inevitable.

    My biggest concern is still maintaining insurance. The DOT requires it, but if they don't have it, my only recourse is to obtain it myself (nearly impossible) or foreclose - and that doesn't solve the problem of having a lapse. When I spoke with their agent today, he said that even if I continue to pay the premiums to maintain coverage and they destroy the house, I wouldn't get anything for vandalism because it's their policy. Unfortunately, that makes sense. But then he told me that I can't get a policy on it even though I'm the one that stands to lose. Something really needs to be done about that.

    Everyone I talk to seems to complain that the banks are too reluctant to loan money. Now I can understand why they only want to loan to people who "don't need it" (as so many claim). They have no protection. It's abominable what people are getting away with.

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  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    13y

    Aren't you the mortgagee? Insurance knows to pay out any claims to mortgagee.

    EDIT: Of course, a mortgagee clause needs to be in the loan, and then the closing agent has to ensure that the insurance declarations contain the mortgagee.

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  • Cindy McHugh
    OP
    Rural Hall, NC · Member since 2012 · 36 posts · 1 vote
    13y

    William,

    Thanks for your reply. My attorney did file a proof of claim. I went to the bankruptcy office myself and verified this.

    I'm not sure what you mean by post-petition payments. They filed for ch 13 on Oct 9, but there has been no plan established yet. They have not made any mortgage payments since July 2011. They have paid their homeowner's insurance since Oct (when they filed ch 13). I received a cancellation notice for December, but they paid it before it cancelled. I paid it for July and Sept and still have not been reimbursed.

    I called the Trustee's office and spoke with the creditors' contact. She said that I should start receiving payments sometime in Feb, unless someone contests the plan. I explained to her that this was creating a hardship for me and that I had concerns with the property being devalued. She suggested I inform the Trustee. I outlined my concerns and hand-delivered them to the Trustee's office yesterday. I've also expressed my concern over not being protected to my attorney, but I have not yet heard back from him.

    Thanks again.

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  • William D.
    Member since 2009 · 155 posts · 41 votes
    13y

    I am a little shocked at how passive you have been as a secured creditor (with a lapsed insurance policy). How can you attorney say there was nothing to do at the 341 hearing? Letting the trustee know the property is uninsured is relevant to everyone. I cant stress this enough, you need to get aggressive by filing a motion for relief or at least trying to negotiate a stipulation. Conventional lenders would have had relief from stay and started foreclosure by now.

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  • Cindy McHugh
    OP
    Rural Hall, NC · Member since 2012 · 36 posts · 1 vote
    13y

    Steve,

    Yes, I'm the mortgagee. The insurance agent said I'd receive payments for any claims, but not for damage caused by them if the policy is in their name - for any other reason, I would. (I think that's what you were referring to???)

    Thanks for sharing your thoughts.

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  • Account Closed
    Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes
    13y

    Unless something's changed there should be a forced place policy available to you. I bought policies twice as the lender, both for non-performing notes to cover me during the foreclosure process. They were for properties with really low values ($35K and $75K) and I don't remember them being too expensive. I can't remember who issued mine. Your insurance agent won't know where to find them. Trust deed and note people are the ones who use forced place insurance. Where are they on BP? Rick Harmon Dion Depaoli?

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  • Cindy McHugh
    OP
    Rural Hall, NC · Member since 2012 · 36 posts · 1 vote
    13y

    William,

    This is all new to me and thus far, I've been following the direction of my attorney and the bankruptcy court reps. I'm thinking that maybe I'll try to find a local r/e investment group to join and maybe I can find some helpful contacts in the area.

    The property is insured as of this moment. I'm thinking the BK court (or the buyer's lawyer) is requiring them to keep that current because they have paid the policy since filing ch 13. (I paid it 2 of the 3 prior months.)

    My concern is more "what if..." I'm worried that if the BK is dismissed, they will cancel the insurance and I want to be prepared for that possibility.

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  • William D.
    Member since 2009 · 155 posts · 41 votes
    13y

    Generally, in a Ch-13 situation. The pre-petition payments (all payments missed up to the date of the petition) are paid over 5 years in the Ch 13 plan. It is the obligation of the debtor to start paying the post-petition payments directly to the lender. If not, then you are not adequately protected (given the negative equity) and can file a motion for relief from stay. Most debtor's attorneys wait for this motion to be filed and then enter into a stipulation to make payments or at least adequate protection payments.

    The next step is very important, assuming they intend on filing a confirmable plan you need to very carefully review it. If you dont object, you are stuck with the plan. For example, if the plan payment calls for an arrearage of X but your proof of claim if actually X+1 then you are stuck with the plan. There are other tricky things debtors attorneys put in plans that you need to watch out for.

    I am not in anyway trying to insult you, I am just trying to let you know that your situation is not what the bankruptcy laws anticipated.

    1Reply
  • Cindy McHugh
    OP
    Rural Hall, NC · Member since 2012 · 36 posts · 1 vote
    13y

    K. Marie - Thanks for giving me some hope. If you happen to remember who you used, please let me know. Maybe I should also try posting under another topic?

    Thanks again.

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  • Cindy McHugh
    OP
    Rural Hall, NC · Member since 2012 · 36 posts · 1 vote
    13y

    William,

    Please, don't worry about insulting me. I truly appreciate everyone sharing their thoughts and insight. I feel as though I've gotten more helpful info here this evening than I've been able to obtain through my attorney and the BK court.

    I am concerned with agreeing to their proposed plan without fully understanding the legal terminology. The only thing I can do is perhaps get the perspective of more than one attorney???

    Thanks again.

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  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    13y

    Another issue is if the case is dismissed they can refile again and start the automatic stay.

    They cannot always refile right away it depends on why the case was dismissed and who dismissed it them or the trustee.

    If they filed again in a certain time frame then they are classified as a multiple filer status and generally the stay provision only is good for 30 days. There a thousand different scenarious that affect how a BK plays out.

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  • Cindy McHugh
    OP
    Rural Hall, NC · Member since 2012 · 36 posts · 1 vote
    13y

    I was wondering if they could/would file ch 7 if the ch 13 is dismissed.

    Oh, and I can't imagine the court would allow 5 years for them to catch up when the balloon is due in 3 1/2.

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  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    13y

    Cindy, "forced place insurance" is a special type of hazard and liabilty insurance provided to lenders, banking institutions, not to individuals, individuals may obtain similar coverage under a standard fire policy for non=owner occupied insureds, that is what you have found.

    I suggest you stick with your attorney with respect to the BK as you are not getting totally correct info, some opinions being stated as factual proceedings. As a former Registered Creditor's Representative in BK court here I can tell you that there is some leeway to what can be agreed or ordered, each case is somewhat different.

    Joel is correct and the type of BK, can be changed, for example if a wage earner looses employment, a spouse dies and other issues change. Generally a person is barred from protection after a discharge and can be if false information was provided. Attempting to sell any asset after filing is in violation of law unless approved by the trustee.

    Was that watersoftner attached to the house, if so you need to object, inform your attorney.

    Another issue is how much debt and what type is being addressed for relief. If there were equity in the home (I'm not seeing that here) doesn't come close to making a difference the trustee may not require a sale. A homestead exemption is an amount that an owner is allowed to keep, that equity amount pluse the secured liens will need to be less than the market value for it to be sold.

    Stick with your attorney.

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  • Joe Bertolino
    Investor · El Dorado Hills, CA · Member since 2012 · 1k+ posts · 1k+ votes
    13y

    Cindy,

    I have not run into this but you have an insurable interest in the home so you should be able to purchase a policy. This is not something most insurance agents run into often so you will need to call around and they will need to do a lot of footwork for very little commission, so be very nice and plead for help. Offering to move the rest of your insurance to them if they can get it done might be enough incentive for them to spend the next two days playing phone tag with underwriters to clear a whopping $60. I ran a market search in one of my industry guides and came back with a few possible leads:

    JB Lloyd in Plano, TX.
    Seattle Specialty
    Noforcedplace.com
    Leeandmason.com
    Arspecialists.com

    Some of these are wholesalers who will not work with you directly but they can let you know if what you are asking for is possible and direct you to an appointed retail agent in your area. I would help but I am not licensed in NC.

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  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    13y

    Key words "insurable interest"!

    You may mention that to agents as you call around, as Joe mentioned it's not a common issue. If you tell them you have an insurable interest by the virtue of the mortgage you hold, most will understand much quicker. It's also a point they need to mention to an underwriter. The light should go off!

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  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    13y

    Cindy you just have to let this play out. Yes if a chapter 13 plan isn't going to get approved or might fixing to be thrown out an attorney can sometimes convert a 13 to a chapter 7.

    Eventually you will gain control of the property it is just a matter of time. The key is finding out what the end game is for the buyer??

    In a dream situation what are they trying to accomplish?? If they really wanted to hold onto the house they should have contacted you to work something out.

    I can tell you even if the plan is confirmed VERY FEW finish the plan that is approved. Think about it for a second. They couldn't pay the regular mortgage and their bills so now they are going to have to pay the mortgage, their other bills, and an additional BK payment covering back debts including what they are behind on with the mortgage.

    Only about 10 to 20% take a plan to full term and receive the full discharge. For the credit the chapter 13 freezes your credit history during the whole time of the plan. So really it is one of the worst things they could do because if they just went to a chapter 7 they could start rebuilding credit right away. They might not pass the test to qualify for a chapter 7.

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  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    13y

    Some good info on bankruptcy from an attorney in the state of PA:

    http://dornish.net/bankruptcy-issues-for-landlords-contractors-and-real-estate-buyers-part-1-the-automatic-stay#more-872

    http://dornish.net/bankruptcy-issues-for-landlords-contractors-and-real-estate-buyers-part-2-claims-and-claimants#more-877

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  • Keith Barton
    Real Estate Attorney · Cleveland, OH · Member since 2011 · 140 posts · 89 votes
    13y

    There are so many intricacies involved in this scenario. While I can't give you definitive answers about specific questions, I can (hopefully) give you some additional explanations to put things into perspective.

    1) Mortgagee (lender) rights. You no longer own the home. You have an interest in the home. The interest you have was given to you to secure repayment of a loan. Whatever interest and/or rights you have were granted by the mortgage document. Mortgagees have certain rights, but these rights mean are not necessarily automatic - they need to have ben granted by (i.e., written into) the mortgage document and/or promissory note. Without seeing those documents, I can't say whether they are missing things that should be in there.

    2) Insurance - there is a huge difference between legally being allowed to force an insurance policy on a homeowner and finding a carrier who will underwrite the policy. Whether or not a carrier will underwrite a policy depends on many business factors. Because you are not a bank, or large investor conglomerate; but rather, a home owner providing financing - I would be very surprised if you can find a carrier who will issue a policy to you.

    3) Bankruptcy. Chapter 7 BK is wipe the slate clean and start over. Chapter 13 BK is kind of like a reorganization (the debtor has to pay back a certain % of the money owed - the % depends on their income, debt, unsecured debt, secured debt, etc....) You must qualify for CH 7 by not having too many assets (the means test - which is a pain to figure out unless you are conversant with it). If you have too many assets (or if you would rather choose CH 13 because you want to keep your house, etc...), you will need to file CH 13. Depending on the circumstances, you could keep your home in a CH 7 case, but that's beyond the scope of this discussion.... You could also lose your home in a CH 13 (in which case you would still have your secured interest in the home - so would recover at least some of the money owed to you - but this is beyond the scope of this discussion). A BK filing freezes all attempts to collect any debts unless/until such time as the BK Trustee/Court says otherwise. Because you have the mortgage, your status as a creditor is (literally) more secure. I ASSUME everything was done to protect your status as a creditor since they are trying to keep the home and you are represented by an attorney - but, I would still keep an eye on things. The meeting of creditors is an opportunity for any/all creditors to make claims against the bankruptcy estate of the debtor - because your claim is secured by a mortgage, your claim is already established.

    4) I seem to recall there being another point I wanted to make when I started this reply, but I'm mistaken or it slipped my mind....

    Good luck.

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  • Cindy McHugh
    OP
    Rural Hall, NC · Member since 2012 · 36 posts · 1 vote
    13y

    First, I want to thank each of you who have taken your time to share your advice and knowledge. It truly humbles me to have people whom I've never met go out of their way to be helpful. I will try to return the favor if I'm ever in a position to do so.

    I've received much more information here, from a group of strangers, than I have from the BK court or my own attorney. I will address the questions/comments separately, but I had to express my heartfelt gratitude.

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