What is force-placed car insurance?

Forced placed car insurance is mandated by lenders if you can't provide proof of insurance. If you don't have car insurance, a lapse in coverage may increase your car insurance rates by 8% or more.

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A former insurance producer, Laura understands that education is key when it comes to buying insurance. She has happily dedicated many hours to helping her clients understand how the insurance marketplace works so they can find the best car, home, and life insurance products for their needs.

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Joel Ohman is the CEO of a private equity backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He has an MBA from the University of South Florida. Jo...

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Reviewed by Joel Ohman
Founder & CFP® Joel Ohman

UPDATED: May 20, 2022

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Here's what you need to know...

  • Force-placed insurance is a type of lender-placed insurance coverage that is put in effect when a driver cannot show proof of insurance
  • It’s important to note that banks and other lenders prefer not to have to purchase force-placed car insurance
  • The force-placed insurance policy will repair that damage or replace the vehicle up to the current value of the loan; the loan servicer receives the money

There are many obscure insurance products that most of us have never heard of, force-placed car insurance might be one of those terms for you.

Force-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 force-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 force-placed car insurance comes in.

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What exactly is force-placed car insurance?

Unlike the main types of car insurance policies, force-placed car insurance is a specific type of lender-placed 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.

Oftentimes, 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 force-placed car insurance if the owner cannot provide his own proof of insurance.

As long as the buyer obtains his own insurance, the force-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 does force-placed auto insurance cover?

Remember that force-placed car insurance simply protects the investment your bank makes in your vehicle; it is a type of collateral protection insurance. If you are involved in an accident, any damage to your car lowers its resale value and puts the banks’ money in jeopardy.

The force-placed insurance policy will repair that damage or replace the vehicle up to the current value of what the bank loans you.

In other words, if $3,000 worth of damage is incurred on a car with a loan balance of $10,000, lender-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 force-placed car insurance is designed only to protect lien holders, there is no coverage for property damage or bodily injury.

What happens if I refuse to pay for force-placed auto insurance?

It’s important to note that banks and other lenders prefer not to have to purchase force-placed 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 lender-placed insurance policy it’s almost always a last resort. Car owners who refuse to purchase their own insurance, or pay for the bank’s force-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 force-placed insurance. To “call” a loan means the bank demands the entire balance of the loan is 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 force-placed policy on its own.

You may wonder if you can remove force-placed insurance on your own. As you can see, you’ll have to do some negotiating with your insurance company and/or bank. Then, you would have to show that you have the required coverages active and in place yourself.

Now that you understand what “force-placed” insurance coverage entails, you are a more informed consumer. If you are interested in purchasing insurance coverage for property damage or injuries in the event of a car accident, use our free tool to compare auto insurance rates.

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