Collateral Protection Insurance: Comprehensive Overview

  • October 31, 2024
  • 4 min read

Author: Barry Binder

Two cars involved in a crash with a graphic that says Collateral Protection Insurance Comprehensive Overview

In today’s dynamic market, lenders need to protect their collateral more than ever. For lenders offering vehicle loans, collateral protection insurance (CPI) is a worthy consideration. 

Data indicates defaults increase during volatile markets. Additionally, unforeseen events such as accidents, thefts, or natural disasters can pose significant financial risks. That’s where collateral protection insurance comes into play.

What is Collateral Protection Insurance and How Does It Work?

CPI coverage protects lenders and borrowers in case a borrower’s collateral (in this case, a vehicle) is damaged, stolen, or totaled. A lender typically requires a borrower to maintain comprehensive and collision insurance; if they do not, the lender has the right to force-place collateral protection insurance on the vehicle. This ensures the asset is covered even when a borrower doesn’t have adequate insurance.

Collateral Protection Insurance FAQs

It’s clear that collateral protection insurance is a fantastic tool in any lender’s portfolio. Like any insurance product, tracking this coverage is key to staying compliant. 

Our clients benefit from our sophisticated borrower insurance tracking system to ensure their compliance and benefit from the peace of mind that comes with knowing their assets are covered – we handle the legwork of the lender-placed insurance policy when a vehicle loan is not adequately insured.

Now, let’s cover some of the most frequently asked questions we receive about CPI insurance.

1) Is Collateral Protection Insurance Legal?

Yes. The history of CPI has caused some confusion so here is some clarification:

  • In 1991, many class-action lawsuits decimated most of the lender-based CPI programs in the US. As a result, very few lenders’ board of directors would allow the use of a CPI program.
  • In 1997, the National Association of Insurance Commissioners (NAIC) introduced the CPI Model Act to enable lenders to use Collateral Protection Insurance with certain restrictions to keep lenders from class-action litigation. 
  • The introduction of the CPI Model Act began the slow re-emergence of CPI insurance for lenders.
  • Nearly 30 years later, Collateral Protection Insurance enables lenders to protect themselves in a legal and compliant way.

2) What Does Collateral Protection Insurance Cover?

  • Collateral Protection Insurance protects the borrower and also the lender, when the borrower fails to prove they have a policy on their vehicle.
  • CPI is issued when the lender’s insurance tracking system has determined that the borrower’s insurance on the vehicle has lapsed.
  • CPI covers against physical damage and other perils to the vehicle only after the borrower is issued or force-placed with a CPI policy.

3) How Does a Lender Benefit from Collateral Protection Insurance?

  • In the event a vehicle is repossessed, “lender coverages” that are part of the Collateral Insurance Policy will apply. 
  • Note: A poorly implemented collateral protection insurance program may invite potential regulatory scrutiny and litigation based on how lenders implement these post-repossession coverages.
  • To ensure you don’t fall trap to scrutiny, review the specific details we’ve outlined here in our article How VSI Insurance Provides Comprehensive Protection for Lenders

Conclusion

The value of CPI is far-reaching for lenders who need to secure their assets when the borrower cannot. With modern tracking technology and a trustworthy vendor, staying compliant and profitable is achievable. For more on this topic, please read our Three Things to Know Overview of CPI Insurance here.

Questions about integrating this product into your Collateral Protection Stack? Please reach out; our experts are ready to answer any questions you may have.

Article Overview:

Collateral Protection Insurance (CPI) is an insurance product that offers coverage for lenders in case borrowers are unable to secure their assets. This insurance provides financial protection and compliance for lenders, ensuring the safety of their investments. By utilizing modern tracking technology and reliable vendors, lenders can achieve profitability while mitigating risks associated with collateral.