First Union Corp. has settled a class action in Florida for $26.1 million, making it the latest bank to take a hit on collateral protection insurance litigation.

First Union spokesman Ken Darby said the settlement, announced last week, covers litigation brought against the Charlotte, N.C.-based bank in Florida by plaintiffs' attorneys and the state attorney general.

The settlement covers First Union customers who had collateral protection insurance placed on their automobile or boat loans from Jan. 1, 1986 to Sept. 31, 1996.

Lenders impose this type of policy, also known as "force-placed insurance," on a customer to protect collateral should the customer allow his or her own policy to lapse.

Plaintiffs' attorneys, who have initiated a flood of such litigation against banks since the late 1980s, have asserted that lenders failed to properly disclose the cost of the policies to their customers.

The settlement requires that First Union, which stopped using the policies with its loans in January, provide cash refunds of $4.7 million to customers who paid off their loans and $19.4 million of credit refunds to those who still carry balances with collateral protection insurance attached.

First Union also agreed to pay $2 million in legal fees. First Union spokesman Jeep Bryant said that the banking company had already set aside reserves to cover its total $6.7 million cash outlay, so the settlement will have no impact on earnings.

First Union said most of the policies involved in the case resulted from loan portfolios that First Union inherited in various acquisitions.

Florida has been a particularly active state for such litigation in recent years. Barnett Banks Inc., Jacksonville, settled a case for $19 million in 1993. NationsBank Corp., Charlotte, followed the next year with a $5.6 million payment to class action plaintiffs.

Banks across the country have generally chosen to settle collateral protection insurance cases rather than take them to a jury because of the potentially bad publicity and expense that could result from a jury trial. Jackson Miss.-based Trustmark Corp., which did go to trial, found itself liable for $38 million in punitive damages when it lost a case in January 1995.

The Trustmark award was later reduced, on appeal, to $5 million.

First Union said it decided to settle its own case "to avoid costly litigation." In order to reach affected customers, the bank plans to place public notices of the settlement in 10 Florida newspapers and contact by mail any individuals whom its records indicate have received collateral protection insurance coverage.

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