DETROIT – A federal court jury awarded Michigan First CU $5 million in damages last week against CUNA Mutual’s CUMIS Insurance Society, finding the credit union insurer violated its insurance bond when it refused to pay the credit union damages resulting from hundreds of defaulted indirect auto loans.
The damages could reach as high as $9 million after interest and penalties under Michigan’s Unfair Trade Practices Act. Earlier, Michigan First won a $415,000 judgement against a local auto dealer that sent some of the defective loans to the credit union. Loans directed through the dealer had a 34% default rate.
More than 1,600 loans went into default under the program, developed through Aimbridge Indirect Lending, causing a loss of $5 million to the credit union.
The jury found that the faulty loans were the result of the intentional violations of the credit union’s lending policies, and that CUMIS had wrongfully denied the $500 million credit union’s insurance claim under the faithful performance provision of the credit union’s bond.
In denying the claim, CUMIS said the responsible=2 0credit union employees did not consciously disregard Michigan First’s lending policy and that the credit union did not enforce its lending policy. CUMIS lawyers also argued the loan policy was too vague to be enforced or violated.
But lawyers for Michigan First asserted their policy was a virtual copy of the model policy developed by well-known loan expert Rex Johnson that appears in the Lending Manual for Credit Unions.
Officials with CUNA Mutual said last week they are exploring their options, relative to an appeal. "We respect the jury’s decision, but still believe the losses incurred by the credit union are not covered under the terms of our bond policy," said Phil Tschudy, a spokesman for the credit union insurer. "We are also gratified the court issued a ruling agreeing with our interpretation of our Faithful Performance coverage as requiring intentional misconduct. Our legal team will be reviewing information from the trial and assessing our appellate options."
