Office of House Bill AnalysisH.B. 540
By: Shields
Financial Institutions


Some creditors require debtors to obtain insurance on collateral and list
the creditor as the beneficiary of the insurance to ensure the repayment of
the principal of a loan. Current law regulates the notice and payment
procedures of collateral protection insurance, but there are no laws
regulating liability, cancellation, and other aspects of collateral
protection insurance. House Bill 540 establishes additional regulations for
collateral protection insurance. 


It is the opinion of the Office of House Bill Analysis that this bill does
not expressly delegate any additional rulemaking authority to a state
officer, department, agency, or institution. 


House Bill 540 amends the Finance Code to regulate the coverage, term of
policy, and conditions of purchase of collateral protection insurance
(insurance) (Sec. 341.502). The insurance is for the sole purpose of
protecting the interest of the creditor if the debtor fails to insure
collateral as required by a credit agreement and the decision by the
creditor to require the insurance is optional (Sec. 341.508).When a
creditor requires insurance that is paid for directly or indirectly by the
debtor, the bill authorizes the creditor to place insurance, under
stipulated conditions, with an authorized insurer or eligible surplus lines
insurer (Secs. 341.503 and 341.507). 

In a situation in which the creditor requires the debtor to obtain
insurance or if the debtor fails to do so and the creditor obtains the
insurance on behalf of the debtor at the debtor's expense, the bill
requires the creditor to notify the debtor by mail not earlier than the
60th day before and not later than the 10th day after the insurance is
purchased. If this notice is returned to the creditor undelivered, the
creditor is required to locate the debtor using regular locating procedures
and to mail a second notice once the debtor is located. 

The terms for repayment to the creditor of the costs of the insurance must
include a balloon payment or full amortization (Sec. 341.503). If
amortization is used by the creditor, the bill requires the creditor to
send the debtor a notice of its terms and any change in the debtor's
periodic payment (Sec. 341.504). 

A debtor may at any time cause the cancellation of the insurance obtained
by the creditor if the debtor has obtained insurance. If a debtor provides
the creditor with proper evidence that the debtor has obtained insurance on
or before the date the insurance is effective, then the bill requires the
creditor to cancel the insurance it obtained and prohibits the creditor
from billing certain charges (Sec. 341.505). 

The bill provides that according to stipulated calculations, the amount of
unearned premiums is required to be refunded to the creditor on the date
the insurance is canceled or expires. The bill requires the creditor to
distribute this refund directly to the debtor by check or other means
within 14 days (Sec. 341.506). 

A creditor, its insurer, or the insurer's agents that place insurance in
compliance with this bill are not directly or indirectly liable to a
debtor, cosigner, guarantor, or any other person in connection with the
placement  of the insurance. The bill does not impose a fiduciary
relationship between the creditor and the debtor. The bill does not create
a cause of action for damages on behalf of the debtor or any other person
in connection with the placement of insurance (Sec. 341.508). 


September 1, 2001.