Collateral protection insurance litigation continues to wreak havoc with auto lenders. The latest victims: NationsBank Corp. and Toyota Motor Credit Corp.

Last week, in federal district court in Miami, Charlotte-based NationsBank agreed to pay $5.6 million to settle class action claims from 55,000 borrowers in seven states. Spokesman Ellison Clary said NationsBank settled the case without admitting any guilt.

"To defend would have cost money and time and there was the possibility of negative publicity as well," Mr. Clary said.

The month before, Toyota agreed to pay $18 million to settle claims arising out of courts in California and Alabama. Toyota's attorneys, in a published statement, denied the plaintiffs' allegations but said the settlement was in Toyota's "best interest."

The settlements by NationsBank and Toyota are only the latest for auto lenders caught up in collateral protection insurance litigation during the last four years. The largest previous payments came from Ford Motor Credit Corp. ($58.3 million); Barnett Banks Inc. ($19 million); First Interstate Bancorp ($16 million), and Mellon Bank Corp. ($6.5 million).

Collateral protection 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.

The product was little known outside the auto lending industry until 1989. In that year, plaintiffs' attorneys in Pennsylvania filed a class action against Mellon, which settled the case in 1990.

The vague nature of federal and state statutes governing collateral protection insurance has created problems for Mellon and other litigation targets. Plaintiffs' attorneys have argued that certain riders or endorsements commonly attached to these policies -- covering the lender's repossession expenses, for example -- are unfair because they inflate the cost of the insurance and are not properly disclosed to the customer.

Similar cases are still pending in Florida against SunTrust Banks Inc., First Union Corp., Ford Motor Credit, and General Motors Acceptance Corp.

San Francisco attorney Mark A. Chavez, who helped negotiate the NationsBank and Toyota settlements on the plaintiffs' side, said Wednesday that settlements from First Union and SunTrust, if they occur, could potentially rival the size of the NationsBank payout.

Other collateral protection insurance cases are pending against Ford Motor Credit in Ohio, Missouri, and Arizona.

"There's still a fair amount going on," said Mr. Chavez, who has spearheaded much of the litigation nationwide.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.