You were charged Collateral Protection Insurance (CPI) because your lender likely did not have current proof that you were maintaining the required full insurance coverage on the collateral securing your loan, with them listed as the lien holder.
Understanding Collateral Protection Insurance (CPI)
Collateral Protection Insurance (CPI) is a policy that a lender places on your collateral (such as your vehicle for an auto loan, or property for a mortgage) when they determine that you, the borrower, have failed to maintain the required insurance coverage. This type of insurance protects the lender's financial interest in the collateral.
Key Reasons CPI is Added
The primary reasons CPI may be added to your loan include:
- Lack of Proof of Insurance: Your lender has not received adequate documentation proving that you have an active, full coverage insurance policy on the collateral.
- Insufficient Coverage: The insurance policy you have may not meet the minimum requirements outlined in your loan agreement. For example, you might only have liability coverage when full coverage (including collision and comprehensive) is required.
- Lender Not Listed as Lien Holder: Your insurance policy may not list the lender as the lien holder or loss payee, which is a standard requirement to ensure they are compensated in case of damage or loss to the collateral.
- Lapsed or Cancelled Policy: Your personal insurance policy on the collateral may have expired or been cancelled, leaving the collateral uninsured from the lender's perspective.
Maintaining appropriate insurance on your collateral is a mandatory requirement of your loan agreement. This condition is explicitly described in the documents you signed when you took out the loan. If this requirement is not met, the lender has the right to add CPI to protect their investment, and the cost of this insurance is then passed on to you.
What to Do If You've Been Charged CPI
If you find a CPI charge on your loan statement, here are the steps you should take:
- Verify Your Current Insurance: Check your personal auto or property insurance policy to confirm it is active, provides full coverage (collision and comprehensive), and lists your lender as the lien holder or loss payee.
- Provide Proof to Your Lender: If your policy meets all requirements, immediately send proof of insurance to your lender. This proof typically includes your insurance ID card, declarations page (showing coverage types, limits, effective dates, and the lien holder's name), and sometimes a copy of the policy itself.
- Act Quickly: The sooner you provide valid proof of insurance, the sooner the CPI can potentially be removed, and you may be refunded for any overlapping coverage periods.
Once your lender receives and verifies your acceptable proof of insurance, they can often remove the CPI charge and adjust your loan balance accordingly.
