Collateral Protection Insurance

Collateral Protection Insurance

Collateral Protection Insurance, or CPI, insures property (primarily vehicles) held as collateral for loans made by lending institutions. CPI may be classified as single-interest insurance if it protects the interest of the lender, a single party, or as dual-interest insurance coverage if it protects the interest of both the lender and the borrower.
Upon signing a loan agreement, the borrower typically agrees to purchase and maintain insurance that must include comprehensive and collision coverage and list the lending institution as the lienholder. If the borrower fails to purchase such coverage, the lender is left vulnerable to losses, and the lender turns to a CPI provider to protect its interests against loss. There is a need for CPI in the market because in the United States nearly 15 percent of all drivers are uninsured.[1]
Lenders purchase CPI in order to manage their risk of loss by transferring the risk to an insurance company. By doing so, lenders also protect the interests of their customers, borrowers, and investors. Unlike other forms of insurance available to lenders, such as blanket insurance that impacts borrowers that have already purchased insurance, CPI affects only uninsured borrowers. CPI is therefore designed to be equitable to the lender and insured borrowers.
Additionally, depending upon the structure of the CPI policy chosen by the lender, the uninsured borrower may also be protected in several ways. For instance, a policy may provide that if collateral is damaged, it can be repaired and retained by the borrower. If the collateral is damaged beyond repair, CPI insurance can pay off the loan.

How CPI Works

When a borrower takes out a loan for a vehicle at a lending institution, he or she signs an agreement to maintain dual-interest insurance, protecting both the borrower and the lender with comprehensive and collision coverage on the vehicle throughout the life of the loan. The borrower provides proof of insurance to the lender, which is verified by the CPI provider or a tracking company.
If proof of insurance is not received, notices are sent to borrowers prompting them to obtain required coverage. If responses to notices are not received, the lending institution may choose to have CPI coverage “force-placed” on the borrower’s loan to protect its interest from damage or loss.
The lending institution passes the premium charge on to the borrower by adding the premium to the loan principal and increasing the loan payments. If the borrower subsequently provides proof of insurance, a refund is issued.