If your lender discovers you’ve let your required insurance lapse on a financed asset, they may purchase a Collateral Protection Insurance (CPI) policy, often called “force-placed insurance.” This policy safeguards the lender’s financial interest but usually comes at a premium cost to you, the borrower.
How Collateral Protection Insurance Works
Loan agreements for big-ticket items like cars usually require borrowers to maintain full insurance coverage. If you let that insurance lapse — whether due to missed payments or switching providers — your insurance company notifies the lender. After providing you notices to supply proof of coverage, if you fail to do so within a set time (commonly 30 days), the lender imposes CPI on the collateral.
The cost of this lender-placed insurance is charged to your loan balance, increasing your monthly payments and total interest paid. While this protects the lender’s investment, it typically offers no coverage for your equity or liability.
Why CPI is Costly
CPI policies often cost two to three times more than standard insurance because lenders buy through select insurers without shopping for competitive rates. The insurer views borrowers in this pool as higher risk since they’ve allowed coverage to lapse. Also, CPI covers only the collateral itself, providing minimal coverage options.
What CPI Covers vs. Your Own Insurance
Unlike your own policy that covers liability, collision, and comprehensive risks benefiting both you and the lender, CPI covers only collision and comprehensive damage to protect the loan balance. It rarely includes liability coverage, which drivers are legally required to have.
Avoiding or Removing CPI Charges
To avoid CPI, keep your insurance active and promptly furnish proof to your lender if you switch policies. If CPI is applied, buy an insurance policy meeting loan requirements immediately and send your insurance declarations page to the lender to have CPI canceled. You are entitled to a refund for overlapping coverage periods.
Additional Resources
Explore related topics like Insurance Requirements on Liened Properties and Property Insurance Obligations on Liens to understand insurance in secured loan contexts.
For further details, visit the Consumer Financial Protection Bureau’s guide on force-placed insurance.
Sources:
- Consumer Financial Protection Bureau (CFPB)
- Investopedia: Force-Placed Insurance
- NerdWallet: What Is Collateral Protection Insurance (CPI)?
