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Home > Blog > Collateral Insurance? What is it?
TUESDAY, JUNE 20, 2017

Collateral Insurance? What is it?

What is single interest or collateral insurance?

Let’s say you have purchased a vehicle and financed it with a car dealer or bank.  During the transaction you promised to provide them with a copy of your insurance that shows you have physical damage coverage.  Physical damage is also known as comp and collision.  Comp is short for comprehensive which is fire, theft, glass breakage, vandalism, things of that nature.  Collision is when you collide with another object.   If you live in Lubbock, Texas, the lender will want you to carry comp and collision insurance so that their interest is covered.

What is the lenders interest?  The lenders interest is the amount of the loan. 

As an example, when you purchase a $25,000 vehicle and put down $5,000, you would then have a loan with a balance of $20,000.  The $20,000 is the lenders interest.  You add that vehicle to your auto insurance policy and name the lender as the loss payee.  Your insurance agent in turns provides the lender evidence of insurance.

Taking it a step further, let’s say you have an accident a week later and the vehicle is totaled.  The insurance company will cut you a check for $5,000 and the lender a check for $20,000. The two checks total $25,000 which was the value of the vehicle.   Now this is an over simplification of the process but you get the idea.

What if you never put the vehicle on your auto insurance policy?  The lender most likely has a blanket policy in effect that will cover their interest, their ‘single interest’ or what is also called collateral insurance.  You have the same accident and the car is totaled.  The lender’s policy will pay them the $20,000 but does not pay you anything.  On one hand, you don’t have to pay off the loan, on the other hand, you are out your down payment of $5,000.

It’s kind of a penalty since you didn’t add the vehicle to your policy as you agreed to do. 

Another very important thing to remember is that this type of insurance does not provide liability insurance.  Liability insurance is what pays on your behalf if you damage someone’s property or injure them.  You cannot renew your driver’s license with this type of insurance, nor can you get your vehicle inspected or renew your registration.

There are car dealers and banks that try to pass this type of insurance off as ‘full coverage’ insurance.  Don’t be misled.  Call or come by All Write Insurance in Lubbock, Texas and let us explain why you need auto insurance and not the stuff that car dealers sell.

Posted 6:33 PM

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