The Minnesota Department of Commerce has forced the nation's largest provider of an obscure but lucrative form of insurance to dramatically overhaul the way it does business in the state.

A recent settlement agreement with New York-based Assurant Inc. could bring money to thousands of Minnesotans who were overcharged for force-placed insurance, which lenders routinely impose on homeowners if they allow their property coverage to lapse. Force-placed insurance, also known as lender-placed insurance, can cost up to 10 times as much as a typical homeowners policy despite offering less protection.

Under the terms of the consent order, Assurant and two subsidiaries — American Security Insurance Co. and Standard Guaranty Insurance Co. — must pay a $5 million penalty, cut rates by 55 percent and provide refunds to as many as 45,000 homeowners, according to the Commerce Department. The new rates are projected to save Minnesota homeowners $40 million to $50 million in 10 years.

"The Commerce Department investigation found that Minnesota homeowners paid hidden exorbitant costs because of Assurant's unfair, anti-consumer insurance practices," Insurance Commissioner Mike Rothman said. "This settlement will provide refunds to Minnesotans who were overcharged in the past, while protecting consumers against unfair and costly insurance practices in the future."

Assurant officials declined to answer questions about their business practices in Minnesota, but the company issued a statement noting it had "cooperated fully" with the state's probe. With more than $1 billion in annual premium volume from the business, Assurant controls about 70 percent of the force-placed market in the United States.

"We believe it is in the best interest of our company and others in the industry to resolve this matter expeditiously and move forward," Assurant spokesman Robert Byrd said in the statement.

The investigation was sparked by a Star Tribune report on abuses within the force-placed insurance market. In one case, a Minnesota homeowner was stuck with a bill of $4,185 for coverage on her St. Paul home when she let her policy lapse, well above the $1,655 she paid for privately placed coverage.

Rothman said he also heard from dozens of homeowners in Minnesota who were wrongfully forced into the coverage by Assurant, even though they could prove they had not allowed their insurance policies to lapse. Rothman said the company ignored their complaints.

"It was a terrible situation," Rothman said. "They felt like they had no place to go with their appeals. So they contacted us."

Across the country, consumer advocates have lambasted the industry for preying on financially troubled homeowners and charging rates that can't be justified. Another problem, according to regulators, is that mortgage lenders often receive commissions or free services in return for steering all of their work to a select company such as Assurant, which tracks insurance compliance and obtains coverage for homeowners when it identifies a lapsed policy.

Pocketing huge profits

Though insurance companies have said their rates are justified because of the unpredictable nature of the risks they are accepting on problem properties, investigations have shown that insurance companies are pocketing extraordinary profits on the business.

In Minnesota, Commerce officials noted that Assurant paid out 25 percent of the premiums it collected in claims, compared with 79 percent for companies in the voluntary homeowners insurance market.

Under the terms of the Minnesota settlement, Assurant will no longer be able to pay commissions to mortgage lenders or their affiliates or offer any related services "at less than cost."

Other states, including California and Florida, have recently taken similar steps and forced Assurant and its main competitor, National General Holdings Corp., to lower rates for lender-placed insurance by as much as 30 percent.

But the biggest investigation is being conducted by a coalition of 44 states under the auspices of the National Association of Insurance Commissioners. Assurant recently announced it had reached a tentative settlement with those states and will set aside a total of $85 million to deal with regulatory actions in Minnesota and the other states.

Unlike the agreement in Minnesota, however, the other states will not be offering refunds to customers who were overcharged for force-placed coverage, said J. David Leslie, a Boston attorney who is leading the multistate examination. Leslie said he could not discuss the terms of the settlement because the deal is confidential until March 6, when states must decide whether to ratify the terms.

"Minnesota has been very forward-thinking when it comes to this issue, and their work has been very helpful to us," Leslie said.

Rothman said he decided to opt out of the NAIC-led effort because he felt Minnesota could strike a better deal for consumers.

To qualify for a refund in Minnesota, homeowners must put in a claim with the Commerce Department. Refunds cover a nine-year period starting on Jan. 1, 2008, and homeowners can seek help if Assurant improperly placed insurance on their property, billed them at excessive rates or if the placement of force-placed insurance caused them to default on their mortgage payments.

Typically, qualified consumers don't apply for refunds because they ignore, or don't receive, notices or do not feel it is worthwhile to pursue the claims process, said Birny Birnbaum, a former Texas insurance regulator who serves as executive director of the Center for Economic Justice.

So far, insurance companies and mortgage service companies have agreed to pay more than $2 billion to settle class-action lawsuits over force-placed insurance, but homeowners have filed relatively few claims, he said. "People just don't file claims," Birnbaum said.