Collateral Protection Insurance: Comprehensive Overview
Author: Barry Binder
Table of Contents
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.
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.
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.
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.
About the Author:
Barry Binder
Executive Director of Client Experience
Barry C. Binder is the Executive Director of Client Experience at HUB Financial Services. In this role he is responsible for the development and delivery of Client Experience strategies, including the promotion and articulation of CX competencies, strategic consultation with clients and staff to identify and address CX challenges, and the promotion of CX thought leadership for HUB Financial Services. In addition, he is responsible for the successful execution of account and relationship management for custom vehicular and real estate insurance risk management products, programs, and services.
Barry joined HUB in 1999, and has spent his entire career in the financial services industry, working and consulting both directly and indirectly with super-regional and regional banks, community-based financial institutions, and credit unions.
Barry received his BA from Illinois State University in 1996 and his MA from The University of Colorado in 2021. Barry resides in Colorado Springs, CO, where he pursues his passion for history and historical preservation, serving as a lecturer at the University of Colorado-Colorado Springs, presenting his research and publications at local and regional conferences, and having served as a Commissioner on the Historic Preservation Board of Colorado Springs and as a member of the Historic Preservation Alliance of Colorado Springs.
Frequently Asked Questions About Collateral Protection Insurance (CPI) for Lenders
What is Collateral Protection Insurance (CPI)?
Collateral Protection Insurance (CPI) is a policy that lenders place on a borrower’s vehicle when the borrower fails to maintain the required insurance coverage. This insurance protects the lender’s financial interest in the collateral by covering potential damages, theft, or total loss of the vehicle.
When is CPI applied to a borrower’s loan?
CPI is applied when a borrower does not provide proof of the required comprehensive and collision insurance on the financed vehicle. Lenders typically use an insurance tracking system to monitor borrowers’ insurance statuses. If a lapse or cancellation is detected, and the borrower fails to rectify it, the lender may then place a CPI policy on the vehicle to ensure continuous coverage.
How does CPI benefit lenders?
CPI safeguards lenders by ensuring that their collateral is protected even if the borrower neglects to maintain proper insurance. This protection is crucial in mitigating financial risks associated with vehicle damage, theft, or loss, especially during volatile market conditions where defaults may increase.
Is Collateral Protection Insurance legal?
Yes, Collateral Protection Insurance is legal. In 1997, the National Association of Insurance Commissioners (NAIC) introduced the CPI Model Act, establishing guidelines that allow lenders to implement CPI programs with specific restrictions to protect against litigation. This act facilitated the resurgence of CPI as a compliant tool for lenders to protect their interests.
What does CPI typically cover?
CPI policies generally cover physical damage to the vehicle, including losses from accidents, theft, vandalism, and certain natural disasters. The coverage ensures that the lender’s financial interest is protected, but it may not provide liability coverage for the borrower. It’s important for borrowers to understand the specifics of a CPI policy, as it primarily serves the lender’s interests.
By understanding these aspects of Collateral Protection Insurance, both lenders and borrowers can better navigate the responsibilities and protections associated with vehicle financing.