Montana State Life Insurance Practice Exam

Can a person require a borrower to acquire insurance from a specific insurer as a condition for a loan?

1. Yes, if the insurance is mandatory

2. No, that is not allowed

3. Only if stated in the loan agreement

4. Yes, but only for specific types of insurance

The correct answer is: No, that is not allowed

The requirement for a borrower to acquire insurance from a specific insurer as a condition for a loan is typically prohibited in many jurisdictions, including Montana. This practice is often seen as restrictive and could be interpreted as an invalid tying arrangement, where a lender attempts to exert control over the borrower's choice of insurance, which may not be fair or reasonable. Legislation and regulations governing lending practices usually protect consumers by allowing them the flexibility to choose their insurance provider. This change was often implemented to promote competition within the insurance market and to ensure that borrowers are not forced into purchasing potentially inflated or unnecessary insurance policies, which could limit their financial options or lead to higher costs. While there may be circumstances under which a specific type of insurance is required (like property insurance for a mortgage), borrowers should still have the option to select their own insurance company, provided that the coverage meets the lender's standards. Thus, asserting that a borrower must choose a specific insurer is generally not permissible.