Understanding force-placed car insurance

If you have a car loan, your lender can legally place you with this policy to fulfill its insurance requirements. This force-placed insurance may not give you liability or personal injury protection, leaving you unprotected during an accident and underinsured. However, this situation can happen by mistake—either your lender doesn’t have proof of insurance or you had some other miscommunication that may be easy to resolve.

How does force-placed car insurance work?

If you have a car loan but not enough insurance, your lender can place you with a forced insurance policy to fulfill your contract. This policy is also known as creditor-placed, lender-placed or collateral protection insurance.

Force-placed insurance is legal because most loan contracts require you to keep full coverage on your car at all times. Your contract likely includes a clause about your lender’s right to use force-placed insurance if necessary. When coverage lapses or you don’t add all the coverage required, your lender stands to lose money if your car gets damaged.

Because the lender is most concerned about its investment, the force-placed policy may protect only your car without providing coverage for you, passengers or other drivers. You may need additional coverage to meet legal requirements, which means that you could still be considered underinsured by your state.

Reasons you might receive force-placed car insurance.

You might receive force-placed insurance by mistake, or you could have breached your contract without knowing it. Reasons your lender might place you with this policy:

• No proof of insurance. Your lender may not have your proof of insurance on file, an easy problem to solve with a few phone calls.
• Switched providers. You might have switched insurers without notifying or naming the lender on your new policy, leading to miscommunication about whether you have insurance.
• Not enough coverage. You might not have all the coverage your loan contract requires, such as comprehensive and collision, or minimum coverage limits.
• Coverage lapse. Your insurer might have canceled your policy after a missed payment or unrenewed term, causing a coverage lapse and breach of your loan agreement.

Is force-placed insurance more expensive?

Yes, a force-placed policy tends to involve a high premium despite its minimal coverage. This rate may be due to the lender perceiving you as high risk, and the increased cost helps the company recover from any damage that may occur under this policy. In addition, the cost may encourage policyholders to address the problem quickly.

What should I do if I have force-placed car insurance?

To clear up the problem of force-placed car insurance, your lender simply needs proof that you have your own policy. Whether you received this policy by mistake or because your coverage lapsed, you can:

1. Shop for a new insurance provider or call your previous one to reinstate your policy, if you have lapsed coverage.
2. Pay your force-placed insurance premium to avoid further problems with your lender.
3. Get a copy of your proof of insurance through your insurance provider.
4. Contact the lender to verify the correct method and address to send the document.
5. Send proof of insurance. In many cases, your lender will refund the force-placed insurance premium if you had insurance all along.

What should I watch out for?

Besides getting your force-placed policy lifted, you might watch for several other situations:

• Denied coverage. Your previous insurer might deny covering you for car insurance. This situation may happen if the company considers you too high-risk after a coverage lapse.
• Legal consequences. You might not meet the legal requirements for liability coverage, bringing on fines or requirements such as filing an SR-22.
• Limited income. If your financial situation changed and you can’t afford full coverage, you could contact your lender to explain your situation. If you can’t lower costs, consider selling your car to pay off the loan and purchasing a car that requires less coverage.
• Car repossession. If you don’t pay for the forced-placed policy, your lender could have the right to take away your car.
• Car accidents. Getting into an accident could mean paying for damage or injuries from your own wallet without proper liability coverage.

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Bottom line

You might receive forced-placed car insurance because your own policy got canceled after a lapse. Or your lender may have placed you by mistake, especially if you recently switched providers.

If you do need full coverage or are deemed high risk, consider several insurance providers to find the best fit for your situation.

Frequently asked questions about force-placed car insurance

• How did my lender find out about my coverage lapse?

  When you get car insurance on a financed car, you likely had to name the lender as an additional insured on your policy. This allows the lender to receive payment for damage if an accident occurs.

  However, additional insured also get notified if changes occur to your policy, such as reduced coverage or a canceled policy.

• Can my car get repossessed for not having insurance?

  Yes, your lender has the right to take over the car if you refuse to pay for or get insurance coverage. However, you can avoid repossession by paying for your forced-placed policy or renegotiating the terms of your contract.

• What happens if I missed an insurance payment for only a few days?

  Your insurance company may still cancel your policy, which could lead to getting force-placed insurance. However, you might be able to reinstate your policy without showing a lapse on your history. Many insurers offer a grace period before canceling your policy entirely.

  To do so, simply call your insurer to ask about reinstating the policy and pay any related fees. You can then send proof of insurance to your lender for a possible refund on the forced-placed insurance.

• Will my insurance premium go up after having a forced-placed policy?

  It might, if you received this policy due to lapsed coverage. An independent insurer may consider you high risk and raise your premium accordingly. Or you might need coverage from an SR-22 insurer, which could involve higher rates because of the company’s specialized policies.