A federal jury awarded Michigan First Credit Union (MFCU) $5 million in damages against Madison, Wisc.-based CUNA Mutual's CUMIS Insurance Society, finding the CU insurer violated its insurance bond when it refused to pay damages resulting from hundreds of defaulted indirect auto loans, reports Credit Union Journal.

The damages could reach as high as $9 million after interest and penalties under Michigan's Unfair Trade Practices Act. Earlier, Southfield, Mich.-based Michigan First won a $415,000 judgment 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 $5-million loss.

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 credit 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 the policy was a virtual copy of the model policy developed by loan expert Rex Johnson that appears in the Lending Manual for Credit Unions.

Officials with CUNA Mutual said 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," says CUNA spokesman Phil Tschudy. "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."

Register or login for access to this item and much more

All Digital Insurance content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access