Single Interest Insurance

Single interest insurance covers the interests of one of the two parties that co-own property. This type of insurance typically covers a portion or all of the outstanding value owed to a lender for mortgaged or leased property. 

Single interest insurance typically applies only to the interests of a lender or financing company, since a lessee’s interest in the insured property usually overlaps with the lender’s interest.​​​​​​​

In most cases, single interest insurance covers damage to or loss of a loan’s underlying asset. Often, it also includes the cost of repossessing that asset, if necessary. Financing companies who lend to customers with marginal or poor credit sometimes require this type of coverage to insure against the cost of customer default. Many states permit lenders to pass the price of this policy onward to the borrower.

The vast majority of single interest insurance policies cover vehicles and other high-value personal property such as pleasure boats and watercraft. Single interest insurance policies commonly offer gap coverage, which reimburses lenders for the difference between the value of the asset and the outstanding loan principal. Other coverage options might include 

• Skip-protection to reimburse the expense of tracing down default borrowers 
• Theft protection to cover assets which may be damaged or stolen
• Repossession coverage to offset the costs and damages incurred during the repossession process.

Most states require drivers to provide proof of automobile insurance before they will allow them to drive a vehicle legally. Likewise, financial service companies typically need proof of insurance before underwriting an automobile loan. If for some reason a buyer cannot show proof of insurance when purchasing the vehicle, the finance company might require that the buyer purchase Vendor Single Interest (VSI) insurance. 

A finance company also may request single interest coverage if the borrower’s credit history is weak or lacking making default more likely. Usually, these borrowers do not have a credit score low enough to deny the loan, but may not have a strong score, or much credit history.

Suppose a risky borrower purchases a $36,000 vehicle. A year later, the borrower gets involved in an accident, and an insurance company declares the car a total loss. The borrower’s insurance policy calculates the value of the vehicle minus depreciation, at $29,000. 

Since the borrower still owes the finance company almost $35,000 in outstanding principal, the insurance company sends the check directly to the finance company. In this scenario the borrower on the hook for the remaining $6,000 of principal on a car that they can no longer drive. The borrower may decide to stop making payments, defaulting on the loan. The finance company’s vendor single interest insurance policy will cover the $6,000 on which the borrower defaulted.