Picture this: You’ve just closed a financing deal, but months later you discover the customer let their insurance lapse, leaving the vehicle exposed to uncovered damages. With 14% of drivers on American roads uninsured, this scenario isn’t just hypothetical– it’s a very real risk that dealers face every day.
Enter collateral protection insurance (CPI), a critical risk management tool when it comes to auto lending and financing. While most dealers recognize its importance as a safety net, there are still many questions and misunderstandings surrounding the topic.
To cut through the complexity, we sat down with the experts at American Risk Services, who have guided countless dealerships through the intricacies of CPI implementation. Drawing from their years of experience, they shared their advice and best practices for dealers and lenders navigating auto risk management.
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What Is Collateral Protection Insurance?
Collateral protection insurance (CPI) serves as a safeguard for lenders when borrowers fail to maintain adequate insurance coverage on their financed vehicles. While traditional auto insurance is purchased by the vehicle owner, CPI is acquired by the lender in the case that the buyer fails to acquire significant coverage.
Because CPI is designed to protect the lender’s financial interest in a vehicle, it typically includes full comprehensive and collision coverage. That means that it insures the car against all standard perils, including damage from accidents, theft, vandalism, and natural disasters.
However, it’s important to note that CPI doesn’t include liability insurance. That means that even if a vehicle is covered by CPI, the driver needs to acquire their own liability coverage. Without it, they can’t legally drive and will be financially responsible for any property damage or bodily injury they cause to others.
How CPI works
The foundation of CPI begins during the financing process. When dealers structure their loan agreements, they include specific language that grants them the authority to purchase CPI if needed. This clause serves as a crucial protection mechanism, clearly outlining the lender’s rights and the borrower’s responsibilities regarding insurance coverage.
Once the loan is active, the lender tracks the borrower’s insurance status, either through a monitoring solution or manual methods. If a borrower’s personal insurance policy is canceled or drops below the required coverage levels, the lender can step in to protect their investment. They’ll purchase CPI coverage and add the premium cost to the borrower’s monthly loan payment.
However, this situation isn’t permanent. Borrowers always have the option to resolve the issue by reinstating their personal auto insurance coverage. Once they secure appropriate coverage and provide proof to the lender, the CPI charges can be removed from their loan payments.
Lenders provide prorated refunds for the period when personal insurance coverage overlaps with CPI, per state insurance regulations. With this system, they can maintain a balance between protecting their financial interests and preserving customer relationships.
The Value of CPI for Auto Lenders
When a customer drives off the lot in a financed vehicle, they’re essentially borrowing an asset worth tens of thousands of dollars. Without proper insurance, a single accident could transform that valuable collateral into a worthless heap of metal, leaving the lender to recoup the losses.
Traditional loan agreements alone can’t prevent this scenario. While they can require insurance, they can’t guarantee compliance.
Especially within a landscape of rising insurance prices, the issue of driving uninsured is unfortunately common. Even if a driver has auto insurance at the time of purchase, they may cancel their policy at any point after that.
This is where CPI comes in. It acts as a safety net, automatically deploying when customer coverage falls short. Rather than having to negotiate with non-compliant customers, dealers can place CPI to bridge any coverage gaps. The system ensures continuous protection of the dealer’s investment, even when dealing with uncooperative customers.
Consumers vs. CPI: A Double-Edged Sword
When it comes to consumers, the role of collateral protection insurance is a bit more nuanced. In practice, it provides many unexpected advantages for drivers.
For one, CPI represents a preferable alternative to vehicle repossession. When a driver fails to maintain traditional insurance, their contract likely permits the lender to repossess the vehicle. However, in many cases, CPI keeps their vehicle on the road and prevents the immediate loss of their transportation. This protection can be especially crucial for individuals whose work or daily life depends on having a reliable vehicle.
Additionally, the pricing structure of CPI can work in many drivers’ favor. Unlike traditional insurance, which bases rates on individual credit and driving history, CPI is typically priced according to the loan amount. This means some drivers might secure more affordable comprehensive and collision coverage than they could through standard insurance markets.
In some ways, this system also provides better stability. Whereas personal insurance can be canceled or undergo frequent rate fluctuations, CPI provides a consistent coverage model. For consumers navigating unpredictable financial circumstances, this consistency can be valuable.
Consumer resistance to CPI
However, CPI is not without its complications. Historically, consumers have had a contentious relationship with CPI placement, with many seeing it as an unfair penalty from the lender without any corresponding upside.
This type of coverage has been further villainized by recent legal challenges. In the last year alone, multiple financial institutions have faced lawsuits due to widespread incidents of false placements. That is, customers getting CPI added to their vehicle while they still had an active insurance policy.
In cases like this, it often comes down to disclosure. While lenders are typically required to disclose CPI placement to consumers within a certain time period, this doesn’t always happen. As a result, the borrower doesn’t have a chance to correct a false placement, and the charge remains on their account.
This issue is magnified for indirect lenders, or those who aren’t in direct contact with consumers. They may inadvertently use outdated insurance information or fail to provide sufficient notice as required by state regulations.
In order to avoid compliance violations and consumer frustration when it comes to CPI, it’s important to enforce strict standards and processes within your business.
Q&A with American Risk Services
To gather some CPI insights for dealers and lenders, we sat down with a couple of experts in the field.
Director of sales Kirk Saunders and account manager Jalen Rose build comprehensive risk management systems at American Risk Services, a subsidiary of AssuredPartners. They partner with businesses across a variety of industries, including the auto lending space. In this interview, they shared how CPI comes into play for their clients, along with their best advice for readers.
Jalen Rose, Modives Sales Director Scott Trainor, and Kirk Saunders (from left to right)
What are some best practices for dealers using CPI in their business?
One thing we focus on when working with lenders is providing proper disclosure to the consumer. When we train our clients, we actually provide scripts so they can present the agreement in a very compliant way.
We have them explain to the customer the requirement of insurance and what will happen if they don’t provide insurance. And then we provide several documents to the customer so it could be disclosed to them. The customer acknowledges the documents by signature.
Then, there’s even follow-up documents that are sent out to the customer. Because the whole idea is that the customer needs to understand what’s going on and what their options are.
For instance, let’s say the customer had a ticket on their record. Their budget may not allow for them to buy their own insurance coverage today, so they’ll allow CPI to be placed instead. But next year that ticket comes off, and a personal insurance policy could be affordable. So we want to make sure they know at that point, “Go buy insurance if that’s the better value for you.” We’re not trying to force CPI upon them without the option to purchase other coverage.
We’re really informing the customer of their loan agreement. It’s all in the loan agreement itself– we’re just providing more substance around the wording of that agreement so they can fully understand it.
What’s the biggest misunderstanding when it comes to CPI?
I always reiterate to our clients that you’re not selling collateral protection insurance. It’s not an insurance policy for the driver. It only covers the vehicle.
And that’s a big difference. Because state liability laws– or they call them financial responsibility laws– that’s what requires everybody to buy the liability coverage. We cannot legally provide that. All we can do is protect the vehicle, which is the collateral to the loan.
That’s key to disclose to the consumer, because ultimately they’re going to get pulled over and say, “Hey, I have liability,” but they don’t.
What’s one thing about CPI dealers should know?
There are a lot of safeguards surrounding CPI that your insurance agency should take care of. Collateral protection insurance should be approved by each state department of insurance. Everything is regulated. If your provider is operating compliantly, they should work with the state to approve the forms, the rates, and how claims are paid.
So in every state, we have to follow exactly the way they’ve approved this program to operate in that state, and that determines the paperwork and everything else that a customer may see.
That’s also why we go overboard on compliance training with the lenders. Because they need to make sure the customer understands what’s going on and isn’t just signing a form at loan closing.
How CheckMy Driver Works with CPI to Protect Your Business
The best way to maximize effectiveness and ensure compliance within your CPI system is to implement reliable insurance monitoring. That way, you can eliminate coverage gaps while avoiding false placements.
CheckMy Driver is an insurance verification and monitoring solution for the auto industry. It continuously pulls and analyzes your customer’s coverage status directly from the carrier, providing you with a real-time view of your entire portfolio in a user-friendly dashboard.
Talk to our team to learn more about how CheckMy Driver can work for your business.
