If you have an auto loan but lack the required insurance, you could end up paying more for car insurance than you would have otherwise.
Force-placed insurance is another word for collateral insurance, also known as collateral protection insurance (CPI). Essentially, when you have an auto loan, your loan provider or leaser requires you to have a certain amount of insurance coverage, ensuring the entire loan will be repaid. But what happens if you don’t prove you have the required coverage? That’s where force-placed insurance comes in — with emphasis on “force.”
Force-placed insurance is insurance that an auto lender will use to protect their financial interests if a borrower doesn’t properly insure their covered vehicle. This ensures the lender will get paid for the remainder of the car loan, particularly if the car is totaled.
Force-placed insurance covers an auto lender’s financial interest in a vehicle. If the vehicle needs repairs, for example, and the borrower lacks the required car insurance, force-placed insurance would ensure that the remainder of the loan is paid, even if the borrower is “underwater” on its loan, meaning they owe more than the car’s actual market value.
Force-placed insurance is enacted when a borrower cannot provide proof that they have the auto insurance coverage that the lender requires, which typically includes collision and comprehensive coverage. Unlike property damage coverage, which covers outside parties’ property damage that the insured person caused, collision and comprehensive coverage apply to the insured’s property damage, such as damage to their own vehicle.
But if a borrower lacks these coverages, force-placed insurance ensures the lender won’t be responsible for any property damages. Rather, the financial risk falls to the borrower, who failed to meet the minimum coverage requirement.
If you maintain the coverage your lender requires, you have no risk of being subjected to force-placed insurance (unless your lender made a mistake, of course). Just show them the required proof of insurance, be it your insurance ID or policy declarations page. As long as you pay your premiums on time and are honest with your insurance company, it will uphold your coverage.
However, if you let your auto insurance lapse or cancel your insurance, you will be responsible for all losses you cause, such as hitting another vehicle and injuring others, or damages to your vehicle that you didn’t cause like natural disasters or car theft.
Worse, your lender may repossess your car, which will remain on your credit report for years, lowering your credit score and making it harder to find housing and employment and qualify for loans. While driving without insurance may seem like a cheap option now, it will certainly cost you in the long run.
The Consumer Financial Protection Bureau specifies that lenders have 45 days to notify you before implementing force-placed insurance, more than enough time for you to obtain new insurance and provide proof to the lender.1
After you’ve proved you have the required coverage, your lender can refund you for the cost of force-placed insurance if it was enacted already.
There are limitations placed on lenders who use force-placed insurance. For example, the charges must be “bona fide and reasonable,” meaning they have a “reasonable relationship” to the cost of actually providing that service. Additionally, force-placed insurance can’t contradict any other existing laws.
So what does force-placed insurance cost, anyway? Depending on your state, lender and level of driver risk, it could range from $200 to $500 a month, significantly higher than regular car insurance. Rates will be even higher if you’re a high-risk borrower, meaning you have a poor credit score or bad driving record or you’re a teen driver or any driver with little experience behind the wheel.
Unlike with regular car insurance, you won’t get to choose your types of coverage with force-placed insurance, raising the cost even more.2
It’s easy to avoid force-placed insurance: simply uphold the required coverage that your auto loan contract mandates. If you’ve sent the insurance proof to your lender, you can avoid force-placed insurance entirely, saving you hundreds or even thousands of dollars.
If you’re faced with force-placed insurance, your best bet is to get the coverage your lender requires and send them the proof. That way, you can get refunded for the high cost of force-placed insurance and rely on regular car insurance instead.
If your lender bought you force-placed insurance wrongfully, send them a notice of error.
Whether you call it force-placed insurance, CPI or collateral insurance, it’s all the same thing: a way your lender protects itself financially if you didn’t uphold your end of the bargain — namely, paying for the required car insurance. Learn more in our frequently asked questions below.
Force-placed insurance is so expensive because you don’t get to choose your level of coverage; the lender does. Also, driving without insurance makes you a high-risk driver, and insurance costs are always more for substandard drivers. However, the cost of your force-placed insurance must be bona fide and reasonable by law, bearing a resemblance to the actual service provided.
Yes, force-placed insurance is legal. When you sign an auto loan contract, it includes a clause about force-placed insurance.
If you use them as an auto lender, a bank can force you to buy insurance. For loaned or leased vehicles, car insurance is a requirement in the contract. If the borrower doesn’t adhere to this requirement, the bank can enforce force-placed insurance.
§ 1024.37 Force-placed insurance. Consumer Financial Protection Bureau. (2023).
What is Collateral Protection Insurance? Capital One Auto Navigator. (2022, May 20).