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 on average nearly 14 percent of all drivers are uninsured, and this percentage is substantially higher in some states.
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.
Read more about Collateral Protection Insurance: How CPI Works, Past Problems, Market Response and Current State
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