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.
At the same time, certain riders or endorsements attached to the policies - covering the banks' repossession expenses, for example - can be criticized as unfair. since they inflate the cost of the insurance and are often not disclosed to the customer.
In the Ford case (Odon USA Meats vs. Ford Motor Credit), a federal judge found that certain endorsements had increased the premium 35% above the premium for the basic coverage.
During the last few years, consumers all over the country have sued banks on grounds that the lenders charged them more for the CPI policies than they would have paid had they not let their own policies lapse.
Most of these 50-some cases were filed in Pennsylvania, Ohio, California, Illinois, and Florida.
The reason: that's where the plaintiffs' attorneys who specialize in these lawsuits are based.
The largest settlements so far have been won in California, against Ford Motor Credit ($58.3 million) and First Interstate Bancorp ($16 million), and in Florida against Barnett.
Most banks and captive finance companies have chosen to settle rather than risk a jury trial because the potential liability is so enormous. The bad publicity is also damaging.
For that reason, the legal issues involved in CPI have never been resolved, despite six years of htigation.
The only case to be adjudicated at the appellate level, Kenty vs. Bank One Corp., did support Bank One's contractual authorization to make certain charges, but an appeal of that decision may limit its use as a precedent.
San Francisco lawyer Mark A. Chavez, one of the most active CH litigators on the plaintiffs' side, said he expects another couple of years of action at the trial court level, and possibly a couple of more year of appeals.
He said that most major lenders have scrapped the hidden endorsements and payments from insurance companies that made them vulnerable to lawsuit.
