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Auto Insurance

Understanding Collateral Protection Insurance

Collateral protection insurance (CPI), also called force-placed insurance, is a type of coverage used by lenders to protect their assets — in this case, your car — from damage or theft if you are unable to obtain standard insurance coverage. Keep reading to learn how CPI works, what it covers, how to remove it, and when you could receive a refund.

Collateral Protection Insurance

Collateral protection insurance (CPI) protects your lending institution from loss if your vehicle is damaged. Unlike personal insurance policies based on your driving habits and history, CPI policies are tied to the value of your car. Lenders use them if you cannot obtain your own coverage through an insurance provider.

These policies are not optional. Instead, they are used to ensure that your car is covered in the event of an accident. Like a personal insurance policy, you pay a premium for CPI each month. The amount of this premium is specified in your loan agreement and is part of your monthly car payment. 

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. 

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.

Vandalism and Theft

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.

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.

First, review your loan agreement to see how much coverage is required by your lender. Next, collect the relevant information for an insurance quote. This includes your vehicle information, including year, make, and model, along with your driving history. This covers any speeding or traffic violation tickets, license suspensions, and accidents on your record.

Your prospective insurance provider may also ask about your current car loan details, including your monthly payment, term length, interest rate, your bank’s name, and proof of insurance.

Once you have this information on hand, shop around and get quotes from several different insurance providers, then compare them to see which one fits your budget and satisfies lender requirements. 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. 

When Could You Receive a CPI Refund?

It is possible to receive a CPI refund, such as when 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 you have been charged 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.