Collateral protection insurance (CPI): basics and background
Sometimes referred to as forced car insurance or lender-placed insurance, collateral protection insurance is enacted when an individual who takes out an auto loan fails to adequately insure the vehicle and the bank or lender forces their own coverage. Because a bank or lending agency technically owns the vehicle, they want the vehicle protected by an insurance policy — which is why collateral protection auto insurance exists.
Collateral protection insurance (CPI) — table of contents:
- How does collateral protection work?
- What does collateral protection insurance cover?
- How much does forced car insurance cost?
- How to avoid CPI
- How to get a refund for forced insurance
When you sign an auto loan contract, you agree to certain stipulations. This includes making loan payments on time and insuring the vehicle adequately. When you enter the loan contract, you’re usually required to show proof of insurance within a certain period. The lender then verifies the documents. If your insurance is valid, collateral protection coverage is not forced upon you. If you fail to get insurance — or if the documents are invalid — the lender is within its rights to add CPI to your loan payments.
Some lenders or lienholders use insurance tracking programs to ensure a vehicle remains insured for the life of the loan.
A lender will typically contact you prior to adding CPI coverage. Moreover, they cannot add coverage outside of the requirements in your loan agreement. If you meet loan stipulations requiring comprehensive and collision coverages with set deductibles at $500, a lender cannot add more coverage on top of this agreement.
Physical protection refers to collision and comprehensive coverages:
- Collision coverage protects a vehicle against damage caused by striking a fixed object: a wall, rail, or another vehicle.
- Comprehensive coverage protects against vandalism, theft, animals, and weather-related damages.
While CPI premiums may vary, collateral protection insurance is often more expensive than car insurance issued through a standard company. If CPI is part of your lease agreement, you'll need to retroactively pay for any days on which you leased the car but didn't carry adequate coverage.
Let's say you signed a loan agreement on August 1st and were expected to carry the specified insurance coverage beginning that day. If your proof of insurance actually began on September 1st, your lender would be within its rights to enforce collateral protection insurance for the month in which your vehicle was not covered. There really isn’t a way to avoid paying the backdated premium.
To put it simply, the best way to avoid having forced car insurance added to your lease agreement is to meet your lender's insurance requirements — and to keep your car insured at that level for the duration of your lease. If you already have CPI, the only way to remove it is to add coverage or buy an insurance policy and show proof of insurance to your lender.
If you need a quote for car insurance to remove CPI or satisfy your loan agreement, enter your ZIP code below to compare rates.
Unfortunately, insurance companies and lenders screw up sometimes. If you actually had the required auto insurance but for whatever reason were charged for CPI insurance, you are entitled to a refund if you can prove you were insured during the required period. Proof can include an insurance card or declaration page. You will need to call your lending institution and present them with your proof of insurance. Typically, you should be able to get a backdated refund.
If your bank or lender will not furnish a refund despite showing proof of insurance, seek legal advice.
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