Collateral Protection Insurance Cases Are Fewer but Remain Expensive

By Cline, Kenneth | American Banker, September 14, 1994 | Go to article overview

Collateral Protection Insurance Cases Are Fewer but Remain Expensive


Cline, Kenneth, American Banker


Like a recurring bad dream, litigation over collateral protection insurance continues to haunt big auto lenders. But the worst may be over, as the volume of cases begins to decline.

The latest victim is Chase Manhattan Bank, which agreed on July 7 to settle a class action lawsuit involving CPI for $1.6 million.

The settlement, in U.S. District Court in Miami, comes 11 months after Barnett Banks Inc. settled a similar suit, in the same coral, for $19 million.

Chase declined to discuss the settlement, which was first reported this month in the St. Petersburg Times.

But the New York-based bank did issue a statement from its lawyers stating that while Chase believed the law was on its side, it decided to pay up "because of the significant costs and litigation risks any defendant faces in class action cases today;

Other CPI cases settled since Barnett's include two in California: Tokai Credit Corp., for $5.5 million, and the former Security Pacific Corp., now BankAmerica Corp., for $4.5 million.

Toyota Motor Credit Corp. is said to be on the verge of settling its claims nationwide. Ford Motor Credit Corp. had agreed to pay $54 million to customers outside California before a new challenge from plaintiffs' attorneys brought more litigation.

CPI is a type of insurance that many auto lenders routinely apply to vehicles they finance when the borrower lets his or her own policy lapse.

It protects the lender's collateral, up to the remaining loan balance, if the vehicle breaks down or is involved in an accident. Until five years ago, CPI was little known outside the industry.

Then, in 1989, plaintiffs' attorneys in Pennsylvania filed a class action suit against Mellon Bank Corp., which settled the following year for $6.5 million.

Mellon, like other auto lenders. was vulnerable for two reasons. Even though CPI per se is perfectly legal, the federal and state statutes governing its usage are vague and open to interpretation. …

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