Many installment sellers and consumer finance companies offer ancillary credit insurance products. Such products may include credit life, credit disability or credit unemployment insurance. Except with respect to required property insurance in connection with secured transactions, the sale of these other ancillary insurance products must be voluntary in order to be excluded from Finance Charge under the Truth-in-Lending Act (TILA).
There is a uniform disclosure that software companies and insurance companies have used over the years to meet the disclosure requirements of TILA to keep the charge for such insurance from being Finance Charge. The disclosure basically contains three components:
- The fact that the insurance is voluntary and not required by the creditor.
- The cost and term of the product purchased is disclosed.
- The consumer signs or initials to indicate his or her desire to purchase the product.
The absence of any of these three elements will make the charge for the credit insurance product part of the Finance Charge; and, the result of this fact, will affect not only the Finance Charge disclosure, but also the disclosure of the Annual Percentage Rate and the Amount Financed.
Property insurance may often be required in secured transactions. The theory here is that the creditor is depending upon the value of its collateral to help secure the repayment of the debt, and to this end, the creditor is entitled to have its collateral insured. Still, there are requirements and restrictions with respect to property insurance in consumer credit transactions.
- With respect to the product generally known as “Credit Property Insurance,” the creditor must give the consumer the right to provide his or her own policy naming the creditor as the loss-payee.
- With respect to “Vendors Single Interest Insurance” (VSI), the policy must include the insurer’s waiver of its right of subrogation in addition to giving the consumer the right to provide his or her own policy naming the creditor as the loss-payee.
- It should also be noted that state law and regulation regulate what types of insurances may be offered and sold, including whether VSI may be sold at all.
Practice Pointer: If you haven’t reviewed your insurance disclosures recently, it is time to take a look at the language of your contract forms and, if appropriate, discuss the same with your insurance provider and your software provider.