By Justin Silver, COO, Modives and Chad Staples, President, Elevation Dealer Services
As part of a lender-backed car purchase, borrowers are typically required to carry full coverage auto insurance throughout the term of their lease, but what happens when the driver cancels his or her policy?
Even with Collateral Protection Insurance (CPI) as a backstop to protect the asset, is that enough? And what happens if there’s a loss between the cancelation of the driver’s insurance policy and the placement of CPI? Is it enough to just have CPI in place from the start of the deal in states where that’s legal?
Where ‘Additional Insured’ Falls Short
As part of the lender’s agreement, the borrower is typically required to add the lender as an additional insured on his or her insurance policy so the lender is notified if the policy is cancelled. That means the lender can require CPI placement when they receive notice of cancellation, but there are a few flaws with that system:
- Time Delay – The borrower could have a policy in place the day he or she drives off the lot, but it could be cancelled due to non-payment in as little as 10 days after it’s bound.
But the additional insured letter typically doesn’t go out from the insurance carrier for another 30 to 60 days. That means the driver is on the road uninsured for up to two months before notice is even served, leaving the vehicle totally uncovered in the event of a loss.
- Inefficient Process – Even once the notice of cancellation is received by the lender, there are the additional steps of opening the hardcopy letter, associating it with the loan, and getting CPI in place. For a busy dealership to lose productivity chasing down those details wastes time.
- CPI Isn’t Full Coverage – While CPI protects most of the value of an asset, it does not provide coverage for any liability as a full coverage auto insurance policy would. Granted liability is not the responsibility of the lender, it can lead to additional headaches during mitigation for a loss.
Even if CPI is placed at the outset of the loan, that liability issue persists, and the full value of the asset typically isn’t covered in the event of loss.
Cover Your Asset by Monitoring Insurance
One of the best ways to protect the value of a loan and reduce the risk of write-off is by monitoring the driver’s insurance coverage during the term of the lease.
Using an automated, digitally-driven and real-time process provides several benefits beyond listing the lender as an additional insured or placing CPI at the outset of a loan, including:
- Fast, Frictionless Notification – Automated insurance monitoring regularly checks with the carrier that coverage is active and adequate throughout the term of the lease without any touch from the lender, so no more opening letters or connecting the dots with loans. Checks are automatically triggered at random intervals.
Also, because monitoring is performed in automatically with results delivered instantly, notice could be served on a cancelled policy up to 60 days earlier than if the lender relies solely on being listed as an additional insured. That means CPI could be automatically placed, substantially reducing risk exposure.
- Risk Remediation Options – In addition to automatically placing CPI, once a policy is cancelled insurance verification and monitoring applications like CheckMy Driver respond by immediately providing the borrower with options to secure an affordable policy that meets adequacy requirements. Resuming insurance coverage in addition to CPI mitigates liability risk and the possibility of CPI not protecting the full value of the asset.
- Notice of Coverage Changes – CheckMy Driver also performs adequacy checks, verifying the borrower’s coverages meet the lender’s requirement and providing notice and remediation when they fall outside of compliance. Parties listed as additional insured on a policy are not notified when coverages change, only when the policy is cancelled, potentially leaving assets under protected.
When paired together, CPI and insurance monitoring pack a powerful one-two punch to protect a lender’s asset from loss due to insurance coverage cancelled or adjusted by a borrower.
Insurance monitoring automatically keeps an eye on a borrower’s policy without any follow-up needed by the lender. Even if CPI is put in place at the outset of a loan, insurance monitoring makes sure CPI remains a backstop, not the sole level of protection.
Best yet, insurance monitoring is typically low cost and easy to set up, so there’s no reason a lender wouldn’t want it in place to help cover their assets.
Modives makes insurance verification and monitoring easy with its product built specifically for auto transactions, CheckMy Driver. Through its AI-driven, real-time process CheckMy Driver verifies that insurance coverage is active, accurate, and adequate, monitoring regularly throughout the duration of a loan for cancellation or changes. To learn more, visit CheckMyDriver.ai.
Elevation Dealer Services meets the unique requirements of auto dealerships by offering a range of tailored solutions, including developing customized coverage programs, providing a comprehensive suite of reinsurance options, and delivering training across all levels of the dealership’s ecosystem. To learn more, visit elevationdealerservices.com.
