What is Collateral Protection insurance, and how does it work?

It’s possible that your monthly loan payment for auto insurance has increased as a result of collateral insurance being added to your monthly payment.

What is, however, collateral insurance? In essence, it is the form of insurance you will receive if you finance a new car and are unable to secure your own car insurance coverage.

You usually don’t get to select; instead, your lender does. If you don’t offer proof of insurance, your lender may acquire collateral automobile insurance on your behalf, with the additional fees added to your monthly car payments.

What is Collateral Protection Insurance?

Your vehicle is used as collateral to secure a loan when you finance or lease an automobile. Your car serves as a type of insurance for your lender: if you default on your payments, your lender can seize and sell your car to recuperate their losses.

Your lender would not be able to sell your car for enough to cover your loan sum if you totaled it. That’s why your loan agreement stipulates that you keep specified auto insurance coverage limitations.

A comprehensive collision insurance policy is usually required by lenders. If your insurance policy is canceled, your lender will meet your insurance obligation with a CPI policy.

CPI is often referred to as force-placed auto insurance, lien protection insurance, or vehicle insurance.

Lenders employ collateral protection insurance to safeguard themselves in the event that a car-loan borrower fails to maintain auto insurance on the vehicle covered by the loan. The insurance protects the lender rather than you, and it is frequently significantly more expensive than a standard motor insurance policy.

Understanding when and how collateral protection insurance may be added to your vehicle can help you avoid the high cost of this insurance as well as the coverage issues it may cause. To be sure you’re getting the finest insurance coverage for your vehicle, here’s everything you need to know about collateral protection insurance.

Examples of Collateral Protection Insurance

Collateral protection insurance is used by both mortgage lenders and auto lenders when a borrower has failed to provide proof of insurance. This sort of coverage may also be called creditor-placed insurance, lender-placed insurance, or force-placed insurance. 

This kind of insurance policy is purchased by a lender to protect itself from the potential loss of the vehicle if the borrower has not shown proof of adequate insurance, or has had coverage lapse or canceled. Carrying a certain level of auto insurance is generally required per the loan agreement. 

Lenders have a legal right to purchase insurance to protect the collateral—and bill the borrower for it.

If your lender gets collateral protection insurance for your vehicle, it will charge you for the policy, generally by folding the premiums into your monthly loan payment.

  • Acronym: CPI
  • Alternate names: forced car insurance, lender-placed insurance, creditor-placed insurance, force-placed insurance

How Collateral Protection Insurance Works 

In general, auto loans demand the borrower to maintain collision or comprehensive coverage until the loan is paid off. The lender will ask for proof of insurance from the borrower, and if none is provided, the lender will remind the borrower that proof of insurance is required.

If the borrower fails to provide acceptable proof of insurance after receiving such a reminder, the lender may choose to insure the car with collateral protection insurance. This coverage’s expense is subsequently passed on to the borrower.

CPI (collateral protection insurance) is a type of car insurance that covers physical damage to your vehicle. When you fail to insure (or correctly insure), it is picked by your lender and added to your loan installments.

When you finance a new car, your lender will impose some conditions on you, such as making monthly payments and acquiring the appropriate amount of car insurance. The lender has a vested interest in having the car financially safeguarded because it is technically their property.

This implies that if it is damaged in an accident and you are unable to pay for its repairs, the loss affects both you and the lender financially.

The main disadvantage of a CPI premium is that it is almost always non-negotiable. If you buy your own insurance, you may usually find lower rates by shopping around and comparing providers.

In addition, the amount of coverage you get with a lender-selected policy will be limited to the amount stipulated in your loan agreement. To select the coverages and limits that suit your insurance needs, you would need to set up your own policy.

This sort of insurance will repair damage or replace the vehicle up to the current value of the auto loan. But keep in mind that this coverage is only to protect the lender, not you.

With collateral protection insurance, the lender knows it can recoup the value of the vehicle in case of an accident. But you will be paying premiums without ever getting the benefit of a claim.

How Much Does CPI Coverage Cost?

The costs for CPI vary from state to state and lender to lender. However, you can expect CPI to be much more expensive than auto insurance that you purchase on your own. There are a couple of reasons for this. 

First, there is no opportunity for you to shop around to find the best deal. The policy the lender chooses is the one you get. In addition, borrowers who do not have their own coverage are considered higher-risk by insurance companies, so the premiums for CPI coverage are generally higher.

It can be hard to determine what CPI will cost, but it is more expensive than purchasing your own auto insurance policy.

Your CPI premium is usually calculated based on the total amount of your car loan. Your personal information, credit score, and driving history aren’t used to determine the price, which is one reason why it generally costs more than buying an auto insurance policy on your own.

There are a few ways that your CPI cost can be calculated:

  • Your lender will submit your loan information to your state’s department or division of insurance, and they will set the premium.
  • The insurance company that your lender uses for CPI will calculate the premium.

Regardless of how your premium is calculated, most states enforce a maximum cost for collateral protection insurance based on the amount of your loan. Sometimes your lender may not find out about your lack of auto insurance right away. In that case, you may have to back-pay your CPI premiums so that you don’t have a gap in coverage.

For example, if you cancel your insurance policy four months ago and your new CPI policy costs $250 a month, you would need to pay $1,000 to make up for the four months that you were uninsured.

Though this kind of insurance is more expensive than purchasing your own policy, don’t forget that refusing to pay CPI could result in your car being repossessed by the lender. 

What does collateral insurance cover?

Collateral insurance is intended to cover any physical damage done to your car, which means, at a bare minimum, it typically comes with collision and comprehensive coverage (though it may come with medical expenses and liability as well, depending on the package your lender purchases on your behalf). Most policies with collateral protection insurance protect against things such as:

  • Theft: Should someone steal items belonging to your car (such as the radio), comprehensive coverage pays for any costs associated with repair or replacement. It also covers damage your car sustains from someone breaking into it. Note: Items that are stolen from your car (such as your wallet, purse, or phone) are typically not protected under this type of coverage.
  • Up to your policy limits, comprehensive coverage would cover the repair or replacement costs of your car if it is vandalized by criminals. Smashed windows, slashed tires, and broken side mirrors are all examples of events covered by comprehensive coverage.
  • Fires: A fire can devastate your car’s appearance and functionality. Comprehensive coverage provides financial protection for both, up to policy limits.
  • Falling objects: although it is unlikely your car will be damaged by anything other than a falling tree or tree limb, stranger things can happen. Comprehensive protects you against anything that falls onto your car, which can include anything from lamp posts, AC units, or other objects that may descend upon your vehicle.
  • Animals (such as striking a deer): If a rodent, such as a mouse or rat, chews on your car’s wiring, comprehensive coverage will pay for your car’s repairs. Comprehensive coverage even covers damage to your car if you hit a deer.
  • Weather events: hail, lightning, and flood water damage are covered under comprehensive coverage. However, if your car is damaged by water from a leaky pipe or roof (in your garage, for example), those types of damage are not covered.
  • Collision with another vehicle—Typically the coverage most people need, collision coverage pays for any damage your car encounters while moving, whether it is your fault or not. It does not cover any damage to the other person’s car.
  • Collision with a fixed object (such as a sign, fence, or parked car): If you back into a parked car, or run over a sign, your collision coverage would cover the damage. It will not, however, pay for the repairs of the object you hit. For that, you would need liability insurance.

What companies offer collateral protection insurance?

CPI is purchased by your lender, so you can’t choose where it comes from. These are some of the companies that provide collateral protection insurance:

  • Allied Solutions
  • Breckenridge Insurance Group
  • CUNA Mutual Group
  • Lee and Mason Financial Services, Inc.
  • State National Companies
  • SWBC
  • WNC Insurance Services

The CPI claims process differs between lenders and insurers. Sometimes the borrower can file a claim directly. Other times, your lender will handle the process.

Before you get in an accident and need to file a car insurance claim, we recommend that you get in touch with your lender or CPI insurance company to understand how their claims process works.

Is Lender-Placed Insurance Legal?

According to the federal Consumer Financial Protection Bureau (CFPB), lenders can impose CPI on borrowers who do not offer appropriate proof of insurance.

It’s vital to realize that the state minimums for insurance coverage may not be sufficient to meet your lender’s coverage needs when it comes to auto insurance.

Some lenders will monitor the insurance coverage of their funded vehicles to see if any borrowers have let their policies lapse or have failed to obtain one.

Your lender has the right to add collateral protection insurance to your loan, but it cannot do so without giving you notice. To begin with, your loan agreement will almost certainly state that the lender has the power to apply CPI if you don’t provide appropriate proof of insurance.

In addition, the CFPB requires that lenders provide notice forms to borrowers without insurance so those borrowers can rectify the situation before the lender purchases a CPI policy.

Collateral protection vs force-placed insurance

Forced-placed insurance is more or less synonymous with collateral protection because both do the same thing and are implemented at the same time.

The main difference between the two is that you can have force-placed auto insurance or force-placed home insurance, but collateral protection can only be added to your car. Therefore, think of collateral protection as a type of force-placed insurance that is only for automobiles.

Collateral protection refunds

Lenders may make errors and force borrowers to purchase CPI when it is not required. There are options available if you were forced to purchase CPI without your consent.

In most circumstances, your lender can remedy the matter by producing a copy of your proof of insurance or your policy’s declarations page. If neither of these options work, you may need to connect your lender with an insurance company agent. The CPI payments should stop once your lender obtains the necessary papers.

Even if you eventually established your own insurance and no longer require lender-selected collateral protection, you may have been charged CPI for any days you were not properly covered.

If this is the case, you will likely not be refunded for any CPI added to your loan payment for the period in which you did not have your own policy in place. You are technical ‘back-paying’ for insurance in this scenario.

Whatever your situation, be sure to communicate with your lender if and when your own policy is in place to avoid any unnecessary additional costs.

How to Avoid Forced Car Insurance

Buying your own auto insurance and adding the lender to your policy as the lienholder should meet the insurance requirements spelled out in your loan document, which will protect you from force-placed auto insurance.

Make sure you do not have any lapses in coverage, even for a short period of time, because you may be required to retroactively pay for CPI coverage during the lapsed period.

If you are charged for collateral protection insurance in error, give your lender the documentation proving that you have adequate insurance in place and request that it cancel the CPI coverage purchased on your vehicle.

However, even if the lender is at fault, make sure you pay the CPI premiums until the mistake is rectified because refusing to pay could result in your vehicle being repossessed. 

Frequently Asked Questions

Do I need CPI?

You do not need collateral protection insurance if you purchase the required amount of coverage prior to the date stated in your loan agreement. If you have not, your lender may establish CPI on your behalf and add the cost to your monthly car payment.

How do I avoid CPI?

You can avoid CPI by being properly insured prior to leaving the dealership (and by avoiding lapses in coverage thereafter).

If you have the required coverages and such in your policy, you will need to provide documentation to your lender proving compliance. Insurance cards show insured dates (both start and end of term), as should a declaration page.

What is the best insurance to avoid CPI?

There are many great car insurance companies on the market, each with its own unique coverage and discount offerings and an algorithm for calculating rates.

Depending on the situation and coverage needs, along with a preferred level of customer service, the best car insurance companies can vary by an individual driver.

Provided you are able to compare rates and coverage options in advance, it is generally preferred to get your own policy from any provider to avoid having to be covered by collateral protection insurance.

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