A wave of potentially disastrous insurance litigation is slamming the Mississippi banking industry.
In recent months at least 15 banks in the state have been hit with lawsuits challenging their collateral protection practices, claiming auto loan customers have been overcharged for insurance coverage.
Though collateral protection insurance cases are common, those in Mississippi are unusual in that they target community banks. In the worst possible outcome, some could meet financial ruin.
About 40 suits have been filed, mostly in U.S. District Court in Biloxi.
The sheer magnitude of the cases - which could be accorded class-action status with damage requests mounting into tens of millions of dollars - conjures up comparisons in some lawyers' minds to the "mass tort" liability cases that have besieged asbestos and breast implant manufacturers.
"It's like a monster with so many heads," said Chevis C. Swetman, chief executive officer of Peoples Bank of Biloxi, which was sued three weeks ago. "It's just a question of when it will end."
The $450 million-asset Peoples Bank faces 72 charges centering on its auto insurance pricing, which was said to constitute a breach of fiduciary duty, among other allegations.
Collateral protection insurance, also called forced placing, refers to a bank's procurement of auto insurance for customers who have allowed their own coverage to lapse.
The premiums are then paid by the bank and added to its customer's loan payment.
In most of the lawsuits, plaintiffs allege that the "forced placed" premiums were much higher than they had paid under their original policies - in some cases three times as high. The banks are accused of keeping a portion of the higher fees in the form of kickbacks from insurers. The banks say the payments are administrative fees.
The majority of Mississippi banks currently engage in this business, or did in the recent past, making most of the state's bankers vulnerable to such lawsuits. No dollar figure on the total amount of forced placed insurance in the banking industry, or premiums charged for it, has been tabulated.
Mississippi bankers' anxiety has been stoked by the appearance of several full-page newspaper advertisements, inviting readers to call certain law firms if they think their bank has placed insurance for their automobiles.
"In the last week I probably had 10 bankers call me about this subject, either telling me they got sued or asking what they can do about this," said Mac Deaver, executive director of the Mississippi Bankers Association. "This is probably the only instance I can remember where nearly every bank is subject to litigation. There's a frenzy going on, and it's probably getting worse."
The trade group has tried unsuccessfully for two years to get legislation passed to curb the litigation. The most recent attempt was killed in the state legislature last week, after the bill failed to reach the floor for a vote in either house.
To shift the blame in the event they are found guilty, several of the banks that have been sued in turn have sued the insurance providers, namely the Mississippi offices of Prudential Insurance Co. and the Ross & Yerger Inc. agency. The banks are claiming that the two companies were responsible for the design of the practice, and therefore ultimately are liable.
"I see these cases as a combination of banks being very greedy in looking to generate fee income and being duped by the insurance companies with expectations that were untrue," said John T. Murray, a lawyer with Murray & Murray in Sandusky, Ohio, a pioneering litigator of collateral protection cases in the late 1980s.
The slew of Mississippi cases was likely triggered by a $38 million judgment a year ago against Trustmark Corp., owner of the largest bank in the state. That award was later reduced by $5 million and was appealed to the state supreme court. The suit was also certified last month with class-action status, reflecting the number of Trustmark customers who filed against the bank since the initial decision.
More than 75 lawyers involved in the pending Mississippi cases met with U.S. District Judge Walter J. Gex 3d two months ago to coordinate the cases. A decision on their class-action status and the monetary damages being sought is expected in mid-March.
"There are a lot of dragons out there to slay," said Lawrence E. Abernathy 3d, a Laurel, Miss., plaintiff's lawyer involved in many of the cases.