In most jurisdictions, a creditor may require that the consumer carry property insurance in an amount to protect the creditor’s interest in collateral given by the consumer to secure the repayment of debt. This insurance is commonly referred to as “credit property insurance.” The various states impose rules relating to such credit property insurance. For example, there may be disclosures required with respect to the right of the consumer to provide his or her own insurance; there may be a certain collateral value floor before such insurance may be required; and, there may be a requirement that the consumer be allowed to cancel insurance purchase from or through the creditor if he or she obtains a replacement policy. 

Property Insurance is one of the more confusing areas in consumer finance law. I want to provide some clarity here.

Property or casualty insurance protects the interest of the owner of the property. It may include an endorsement that protects the interest of the lender in the property as well. This type of coverage is known as “dual interest” and sometimes comprehensive. If the consumer provides such a dual interest policy, then there is a near universal prohibition (among the states) on the right of the creditor to impose credit property insurance that only insures the creditor’s interest.

There is a product known as “limited physical damage insurance.” It typically helps cover the cost of repairs if the debtor is at fault for a car accident that damages another vehicle or property, such as a fence or building front. Property damage liability coverage usually does not cover damage to the consumer’s own vehicle unless the product is comprehensive.

Credit property insurance that only ensures the interest of the creditor is another type of property insurance product. This product is known as “single interest.” In most states, if the collateral is of a certain minimum value, and the consumer does not provide property insurance, then a creditor may indeed require that its interest be protected, even if the debtor chooses not to insure his or her own interest. Single interest credit property insurance provides such coverage.

Then, there is the concept of “forced placed insurance.” This is a single interest product purchased by the creditor and charged to the consumer in those instances when the consumer fails in an obligation to purchase property insurance to protect the interest of the creditor. This product is generally acquired and charged to the consumer post-closing and does not require the consumer’s consent because it is only acquired if the consumer has failed in a contractual obligation to carry property insurance for the benefit of the creditor.

And, finally, there is the product known as “Guaranteed Asset Protection (GAP) Insurance.” Unlike credit property insurance, GAP insurance may not be required as a condition for the extension of credit. This product is designed merely to cover the difference between the amount of the unpaid balance on the debt obligation and the collateral value in the event of default or casualty. GAP Insurance and GAP Waivers are different products. See my earlier blog delineating the difference in these products at Back to Basics, Continued—GAP Waivers and GAP Insurance.

Note that none of these products are designed to fulfill the obligation to maintain liability insurance imposed upon drivers under the financial responsibility laws of the states.

Please Note: This is the one hundred seventy-seventh blog in a series of Back to Basics blogs, in which relevant and resourceful information can be easily accessed by clicking here.