Can You Reject Junk Insurance?

Limited insurance policies have plagued our membership for years. Common iterations of these policies include named-driver coverage (policy only provides coverage for the driver listed on the policy), excluded-driver coverage (the policy that states that it does not cover a specific driver), and high-deductible policies. Car creditors throughout the state wonder whether they can refuse to accept such “junk” insurance as a way to protect their collateral. The answer is yes, so long as your refusal is based on a reason that the Office of Consumer Credit Commissioner has established as acceptable.
Texas Finance Code Section 348.201 permits a lien holder to require that a retail buyer procure insurance to protect the motor vehicle that is the subject of a retail installment contract. Due to the proliferation of limited policies like those described above, TIADA took action by pointing out the problem to the OCCC that these policies fail to provide adequate coverage.

The Texas Insurance Code Section 549.052 provides that, in a financing transaction, “a lender may not require as a condition of financing that the borrower obtain an insurance policy covering the property that is the subject of a transaction from ‘a particular agent, insurer, or other person[.]''

In light of this Insurance Code provision, OCCC issued a motor vehicle sales finance bulletin on property insurance in December of 2012 declaring that lien holders may do the following:
  • Require a buyer to obtain an insurance policy that contains certain terms that protect the holder's interest
  • Prohibit a buyer from obtaining a named-driver policy
  • Prohibit a buyer from obtaining an excluded-driver policy
  • Require that the buyer policy purchase a policy that has a deductible below a set amount.
However, a lien holder may not prohibit a buyer from obtaining insurance from a particular agent or insurer unless, pursuant to Insurance Code Section 549.056(c), the prohibition is based on reasonable and nondiscriminatory grounds relating to the financial soundness of the insurer or the insurer's ability to service the policy (emphasis added). Notice that I emphasized “ability”. Ability to service a policy is not the same thing as willingness to service a policy.

The key takeaway is one that our general counsel, Michael Dunagan, offered in the February 2013 issue of Texas Dealer magazine:
The best procedure would be to counsel buyers on what is expected in terms of insurance before they are sent out to purchase insurance and explain why an existing limited policy is not acceptable. While a seller can't dictate from whom insurance must be purchased, there is not a prohibition against the seller referring the buyer to an agent or company that provides appropriate coverage.


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