What is “forced placed” car insurance?

Forced placed car insurance mandated by lenders if you can't provide proof of insurance. Any lapse in coverage may increase your car insurance rates by 8% or more.

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UPDATED: May 14, 2020

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Here's what you need to know...

  • A type of insurance policy placed on a car if its owner is not able to provide proof of insurance to his bank or other lenders
  • It’s important to note that banks and other lenders prefer not to have to purchase forced placed car insurance
  • The forced placed insurance policy will repair that damage or replace the vehicle up to the current value of the loan

There are many obscure insurance products that most of us have never heard of, forced placed car insurance being one of them.

Forced placed car insurance is a product that’s rarely used since almost all of us carry our own individual car insurance policies. In fact, when a person is subject to forced placed insurance he has no say in the cost or coverage.

From the perspective of the car owner, it is illegal in most states to drive without insurance. However, insurance isn’t needed if a car will be stored over a long period of time and not driven.

From a lien holder’s perspective, they may still want a car insured even though it’s not being driven because they have a financial investment in the vehicle. That’s where forced placed car insurance comes in.

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What exactly is forced placed car insurance?

Unlike the main types of car insurance policies, forced placed car insurance is a specific type of insurance policy placed on a car if its owner is not able to provide proof of insurance to his bank or other lenders.

When a bank loans you money to buy a car, it is in their best interest to make sure the car is insured at all times, whether it’s being driven or not. Even a car stored in a garage is subject to a loss from things like fire, theft, and acts of nature.

Therefore, a bank must protect its interest as long as the lien exists on the vehicle.

Often times, if car buyers actually took the time to read their sales contracts in detail, they would notice that their lending institution has written into the deal its intention to purchase forced placed car insurance if the owner cannot provide his own proof of insurance.

As long as the buyer obtains his own insurance, the forced placed policy will not be enforced and the buyer will not be charged. But, if no proof of insurance is provided in a specific amount of time, or insurance lapses sometime in the future, the bank’s policy will be enforced and the car owner will have to foot the bill.

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What happens if I refuse to pay for forced placed car insurance?

It’s important to note that banks and other lenders prefer not to have to purchase forced placed car insurance. They do so as a means of protecting their own financial investment as well as encouraging car owners to purchase insurance on their own.

When a bank activates a forced placed policy it’s almost always a last resort. Car owners who refuse to purchase their own insurance, or pay for the bank’s forced placed policy, are putting both themselves and their bank at risk.

The bank has several options in dealing with such a situation.

While auto insurance laws differ from state to state, in most cases a lender can call a loan if the owner refuses to pay for forced placed insurance. To “call” a loan means the bank demands the entire balance of the loan be paid by the borrower immediately.

Even if the borrower is only in the second year of a six-year auto loan, if that loan is called by the bank the entire balance is due usually within 60 to 90 days.

Failure to satisfy the loan may result in the repossession of the vehicle.

Another option for banks is to file civil litigation against the borrower. The cost of such a strategy generally prevents banks from going down this road, especially since the litigation could eventually exceed the value of the vehicle

A third option is for the lender to absorb the cost of the forced placed policy himself.

What does forced placed car insurance cover?

Remember that forced placed car insurance simply protects the investment your bank makes in your vehicle. If you are involved in an accident, any damage to your car lowers its resale value and puts the banks money in jeopardy.

The forced placed insurance policy will repair that damage or replace the vehicle up to the current value of the loan.

In other words, if $3000 worth of damage is incurred on the car with a loan balance of $10,000, forced placed insurance will cover the cost of repairs.

If the car is totaled, the policy will pay the bank the remaining $10,000 due on the loan. Since forced placed car insurance is designed only to protect lien holders, there is no coverage for property damage or bodily injury.

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