A “tie-in arrangement,” also known as “insurance packing,” in the insurance industry consists of a lender’s extension of credit to a borrower on the condition that the borrower purchase certain insurance, usually from an insurer with close ties to the lender. The premium amounts for the insurance are usually added to the amount of the loan without the borrower’s request or knowledge, and he may not find out about the tie-in arrangement until the lender presents the pre-prepared loan documents at the closing of the loan.
The law views the practice of tie-in arrangements as coercion of the borrower. Thus, both federal and state statutes prohibit the practice.
The National Association of Insurance Commissioners’ (NAIC) Model Unfair Trade Practices Act prohibits lenders from requiring a borrower to purchase insurance from a particular insurer when the borrower is obligated to purchase insurance to acquire a loan or extension of credit. Other acts promulgated by the NAIC apply specifically to life or credit accident and health insurance, and most states have enacted a version of such acts. These acts prohibit insurers from charging excessive premiums, overinsuring, failing to disclose important terms in the insurance policy, and coercing borrowers.
Borrowers who are required to purchase insurance to secure their loan or extension of credit may be given the option of providing the required insurance on their own rather than using the tied-in insurer provided by the lender. However, the lender may be permitted by law to decline the insurance provided by the borrower for reasonable cause.