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No, You Can’t Build a Collateral Protection Insurance Program Around a Liability Policy

I bet you think I’m being hyperbolic, making extreme statements about what you can and can’t do. OK, I suppose you can build a collateral protection insurance program around a liability policy. You can do it in the same way that you can do cartwheels in traffic or put a snapping turtle in your pants. These things are not impossible, but the outcomes may be gruesome.

Collateral Protection Insurance, or CPI, is a longstanding and well-regulated risk management tool that bhph dealers and other auto creditors have relied on for decades to fill the insurance gaps in their finance portfolios. CPI’s success is rooted in it’s conceptual and legal clarity:  the assertion, supported by law in every state, that a creditor’s right to require property insurance on finance collateral includes the right to purchase insurance, at the debtor’s expense, if necessary. Over the past four decades creditors have looked to CPI to insure tens of millions of otherwise uninsured autos. To say the product has been stress tested is an understatement.

Recently I’ve been asked about streamlining the CPI process. Why can’t a creditor just charge customers a monthly fee and assume the risk of loss directly? Rather than buying insurance and passing on the cost as with CPI, the dealer would become the insurer. Seems reasonable enough. The problem is that the exchange of money in return for a promise to repair or replace a damaged car is by definition an unlicensed insurance transaction, making the creditor an unlicensed insurer.

You do not want to be an unlicensed insurer. The reasons why are numerous enough to deserve their own post

Adding a contractual liability insurance policy to the mix as some have proposed can’t solve the problem. Contractual liability insurance exists solely to insure liability assumed by one party to a contract. In other words, a contractual liability insurance policy, or CLIP, merely transfers risk; it can’t create legality where it does not already exist. So, using a CLIP to insure an unlicensed insurance agreement does nothing more than slap insurance over a violation of insurance law.

And that, my friends, is why you can’t – OK, really shouldn’t – try to build a CPI program around a contractual liability policy.

If you plan to give it a shot, I know a guy who will lend you a snapping turtle, no questions asked.