What is Collateral Protection Insurance?
Collateral protection insurance (CPI) is used by lenders to cover borrowers who fail to secure or maintain their own auto insurance. Lenders typically require borrowers to keep full coverage auto insurance for the duration of their lease, so if the borrower stops paying premiums or cancels coverage, they are in breach of their lease agreement or auto loan terms.
An insurance company or the DMV can report you to your lender for not carrying adequate car insurance. In this case, the lender may purchase CPI, also called force-placed auto insurance, and require you to pay the monthly premium for it, plus fees. These payments are mandatory once your lender purchases a CPI policy and tend to cost more than a standard plan.
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Understanding Why Collateral Protection is Needed
If a borrower fails to maintain their end of the lease agreement, lenders must still protect their investment. Lenders require borrowers to purchase coverage under contract to mitigate the risk of damage to the car when it is uninsured or underinsured. CPI enables lenders to take matters into their own hands to ensure the car remains insured and their property is protected.
Once a lender puts a CPI policy in place, they require the borrower to begin making monthly payments. Lenders must notify borrowers by mail when enacting CPI and include the terms and conditions of the new policy, which operates similarly to regular comprehensive coverage. Read on to learn how CPI works in greater detail.
How Does Collateral Protection Insurance (CPI) Work?
CPI started in the late 1980s after the savings and loan crisis when lenders realized that the volume of unsecured and uninsured loans being issued put them at risk. To combat this issue, CPI was created to insure assets if borrowers could not obtain their own insurance policies.
In the case of a car loan, your vehicle is collateral. This means it acts as a type of security for the lender: If you stop making payments on your car, your lender can repossess it and sell it to recoup the outstanding portion of the loan. However, your collateral loses value if you are involved in an accident and do not have insurance. If you default on your payments, your lender is left with an asset that has lost significant value.
CPI bridges the gap. Also called force-placed insurance, it is put in place by lenders when you do not have your own insurance. Using the insurance company of their choice, your lender obtains a CPI policy for your car, which provides proof of insurance in the case of an accident. The cost of this insurance is then written into your loan agreement and added to your monthly car payment.
When is CPI Enacted?
If you fail to maintain adequate insurance as per your loan agreement, you may have the opportunity to reinstate your coverage through your insurer. If you are not given this option or do not comply, your lender can purchase CPI. They may notify you before or after purchasing a CPI policy, detailing your new monthly premium requirements and fees.
What Does CPI Cover?
In many cases, CPI includes collision and comprehensive coverage but does not include liability or medical coverage offered by individual plans. This means that while your vehicle may be covered for repairs if you are in an at-fault accident, medical expenses for you and your passengers in the event of a crash are not. You are still responsible for these injuries and damages, meaning you could pay a significant out-of-pocket amount to cover the costs.
Specific coverages for CPI include:
- Collision with other vehicles: If your car collides with another vehicle — whether you are at fault or not — CPI coverage pays for damages to your car. However, it does not pay for damages to the other driver’s vehicle or injuries sustained by anyone in either vehicle.
- Collision with fixed objects: CPI also covers vehicle collisions with fixed objects. Common examples include fences, signposts, or light poles. While collateral protection insurance pays for your vehicle damage, you are responsible for the costs of fixing the damaged object.
- Fire: The comprehensive part of your CPI policy covers fire damage. For example, if a fire in your apartment building’s parkade and your vehicle sustains damage, your CPI covers the cost up to policy limits.
- Weather: Weather events such as hail, floods, and lighting are covered under CPI. However, water damage from issues within your home, such as leaky pipes or broken washing machines, is outside of CPI policies.
- Falling objects: Damage from falling objects such as tree branches, AC units, or building materials is covered by CPI.
- Theft and vandalism: If thieves break into your car to steal the stereo and cause damage during the theft, CPI covers the cost. The same applies to vandalism, such as graffiti, smashed mirrors, or slashed tires. However, the personal property in the vehicle, such as your wallet, purse, or phone, is not protected by CPI.
How Much Does CPI Cost?
Depending on the type of vehicle you purchase, its current value, and the price to repair the vehicle in your area, the cost of your CPI policy may range from $200 to $500 per month. Because CPI is a general policy designed to protect the lender’s asset, its price is tied to the vehicle’s value rather than your driving habits. As a result, it may be more expensive than a personal policy.
This cost is added to your monthly car loan premium rather than assessed as a separate fee. This is because the loan policy is held by your lender, not you, and is designed to protect their investment. The lender is paying an insurance company for the coverage, and you are paying the lender to offset this cost. Because CPI costs are part of your monthly car payment, failure to pay means you’ve defaulted on your loan, and your lender may have grounds to repossess your vehicle.
Alternatives for Lenders
CPI is not the only way for lenders to protect their investment and manage risk. Alternatives include the following other types of insurance.
Lenders may choose to insure themselves against damage to a leased vehicle. Self-insurance programs allow lenders to avoid paying for CPI on behalf of borrowers who default on their coverage; however, this opens lenders to the risk of paying for any and all damages themselves.
In exchange for not paying a third party to insure the vehicle through CPI, self-insured lenders assume the financial responsibility of protecting their own investment. Unlike comprehensive coverage through CPI, self-insured lenders do not enjoy any additional protections for added risks such as bad drivers, acts of nature, or economic shifts affecting the cost of repairs.
Lenders can also choose to purchase blanket insurance, which essentially requires other borrowers and entities the lender does business with to supplement the cost of a borrower’s unpaid premiums. Blanket insurance takes into account the total number of loans distributed by the lender and requires either a set cost per vehicle or a percentage of the loan amount.
While a blanket policy may offer some savings to small-business lenders, the nature of blanket insurance means a lender’s cost for this coverage increases as their business grows. An additional deterrent against this type of insurance is state law, which prevents lenders from charging blanket insurance costs to borrowers in some cases.
How Do You Remove Collateral Protection Insurance?
You can remove CPI insurance from your vehicle by obtaining your own insurance policy and providing proof of this policy to your lender.
- Review your loan agreement. See how much coverage is required by your lender.
- Collect the relevant information. This includes:
- Vehicle information, such as year, make, and model
- Driving history, such as any speeding or traffic violation tickets, license suspensions, and accidents on your record
- Current car loan details, including your monthly payment, term length, interest rate, your bank’s name, and proof of insurance
- Shop and compare quotes. Get quotes from several different insurance providers, then compare them to see which one fits your budget and satisfies lender requirements.
- Provide proof to lender. Once you have proof of your new policy, provide this information to your lender. With your new policy on file, they can cancel your CPI and reduce your monthly payments.
How to Get a Refund
You may be entitled to a CPI refund if the lenders make a mistake and take out a CPI policy even though you have sufficient coverage. For example, this could happen if data is entered wrong or if there is a delay between when you purchase individual coverage and when your lender notifies their CPI provider.
If this occurs and you were for CPI when you had sufficient coverage, contact your lender and provide proof of insurance showing you were covered during this time. Once this proof is received, they can issue a CPI refund.
All in All
CPI enables lenders to collateralize their loan, even when a borrower fails to insure their car. While CPI is designed to serve lenders by protecting their investment and mitigating their risk, borrowers can also avoid consequences like paying to have their car repossessed by paying the required CPI fees.
Overall, both lenders and borrowers are best protected with some type of insurance in place. You can avoid breaking your loan agreement and paying costly CPI fees by maintaining the comprehensive coverage requirements of your lease contract. Consider consulting an insurance professional to ensure your policy complies with your lender’s requirements.