Toyota Motor Credit Corp., the finance arm of Toyota Motor Corporation, has agreed to pay $59 million to settle a class action lawsuit over its failure to provide partial refunds of the fees paid by customers for Guaranteed Asset Protection (GAP) insurance. GAP insurance is a product that covers the difference between the market value of a vehicle and the remaining balance of a finance agreement in case of a total loss.
What Is GAP Insurance and Why Is It Important?
GAP insurance is an optional coverage product that comes in handy in the event of a total loss. The definition of “total loss” is a situation in which a vehicle is irreparable or the cost of repairing it exceeds its value. In total loss situations, the primary auto insurance may base its settlement offer on the value of the vehicle minus depreciation. Often, this value falls short of the balance remaining on the finance agreement. The result is a deficiency balance — the difference between the money owed and the settlement offer — which the customer must cover.
For example, imagine that a customer takes out a loan to finance the purchase of a new $20,000 Toyota Corolla. The customer pays off $3,000 on the loan before getting involved in a wreck. The insurance company declares the vehicle a total loss and offers a settlement of $15,000, which is the depreciated value of the model at the time of the accident. Unfortunately, that leaves a deficiency balance of $2,000 that the customer still owes the lender. GAP insurance would waive the deficiency balance or provide a refund that covers the out-of-pocket expenses.
What Was the Allegation Against Toyota Financial Services?
The class action lawsuit alleged that Toyota Financial Services failed to provide customers with a partial refund of the fees they paid for GAP insurance after they paid off their finance agreements early. According to the plaintiffs, this practice violated the terms and conditions of the GAP agreements, as well as various state laws that require GAP providers to refund the unearned portion of the GAP fees.
The lawsuit claimed that Toyota Financial Services collected millions of dollars in GAP fees from customers who did not receive the full benefit of the product. The plaintiffs sought to recover the GAP refunds that they were entitled to, plus interest and damages.
How Did Toyota Financial Services Respond to the Lawsuit?
Toyota Financial Services denied any wrongdoing in response to the claims that it failed to provide sufficient refunds to finance agreement customers with GAP insurance, but agreed to a settlement in the interest of avoiding the costs and risks of continued litigation.
The settlement, which was granted final approval by a federal judge on Nov. 16, 2023, established two classes of customers who are eligible to receive a cash payment:
- The Statutory Class includes customers who entered into a finance agreement with GAP insurance in Alabama, Colorado, Indiana, Iowa, Massachusetts, New Jersey, Oklahoma, Oregon, Texas, Vermont, Wisconsin or Wyoming, and who meet the following criteria:
- Their agreements were assigned to Toyota Financial Services
- They paid off their finance agreement 30 days or more before the maturity date, on a date that falls during the statutory period
- They did not receive a GAP refund or suffer a total loss of their vehicle during the term of the finance agreement
- The Non-Statutory Class includes customers who meet the following criteria:
- They had finance agreements with GAP insurance assigned to Toyota Financial Services
- They paid off their finance agreement 30 days or more before the maturity date, on a date between Jan. 1, 2016, and Oct. 25, 2021
- They did not receive a GAP refund or suffer a total loss of their vehicle during the term of the finance agreement
- They did NOT have a vehicle covered by the Statutory Class definition
The Statutory Class members can receive the full amount of their GAP refund without any deduction for cancellation fees, plus interest. It is estimated that Toyota Financial Services will pay $19.1 million to this class.
The Non-Statutory Class members will be eligible to receive up to the full amount of their GAP refund without any deduction for cancellation fees, and will be paid from the $59 million settlement fund.
What Are the Implications of the Settlement?
The settlement is one of the largest of its kind ever imposed on an automotive company, and reflects the growing scrutiny of the auto finance industry by regulators and consumers. The settlement also serves as a reminder for customers to review their finance agreements and GAP policies carefully, and to seek refunds when they are due.
Toyota Financial Services is not the only company that has faced legal action over GAP insurance refunds. In 2018, the Consumer Financial Protection Bureau (CFPB) ordered Wells Fargo to pay $1 billion in fines and restitution for, among other things, failing to refund GAP insurance fees to customers who paid off their auto loans early.
The settlement also comes at a time when Toyota Motor Corporation is facing another legal challenge over its alleged role in the 2023 Myanmar coup. A group of human rights activists and lawyers filed a complaint with the International Criminal Court (ICC) accusing the Japanese automaker of aiding and abetting crimes against humanity by supplying vehicles to the Myanmar military.
Toyota Motor Corporation has denied any involvement in the coup, and said that it has no control over how its vehicles are used by third parties.
