Settlement Returning Overdraft Fees Deemed Potentially Insurable

The United States District Court for the District of Minnesota, applying Delaware law, has held that a bank’s settlements of lawsuits seeking the return of allegedly improper overdraft protection fees collected by the bank from its customers may constitute covered “Loss” under the bank’s professional liability insurance policies.  U.S. Bank Nat’l Ass’n v. Indian Harbor Ins. Co., No. 12-cv-3175 (D. Minn. July 3, 2014). 

The bank’s customers filed class actions alleging that the bank improperly manipulated the order in which it processed their transactions in order to cause their accounts to be overdrawn multiple times, thus maximizing the number of fees the bank could charge for overdraft protection services.  The bank settled the customer lawsuits, agreeing to pay $55 million to customers who had been charged multiple overdraft fees, and sought coverage for the settlement under its professional liability policies.  The policies afforded specified coverage for “Loss,” defined to include “the total amount which [the insured] becomes legally obligated to pay on account of each Claim” but not to include “[m]atters which are uninsurable under the law” or “principal, interest, or other monies paid, accrued or due as the result of any loan, lease or extension of credit by [the insured][.]”  The insurers disclaimed coverage for the settlement, arguing that, the amount paid in settlement fell within the specified exceptions to “Loss” and was thus not covered.

In the coverage litigation that followed, the court denied the insurers’ motion for judgment on the pleadings, noting that no Delaware authority has expressly held that restitution is uninsurable as a matter of law.  The court also noted that the policies excluded coverage for claims “brought about or contributed in fact by any . . . profit or remuneration gained by [the insured] or to which [the insured] [was] not legally entitled . . . as determined by a final adjudication in the underlying action[.]”  According to the court, because the parties expressly excluded any restitution resulting from a final adjudication through this exclusion, “they must have not intended to include any restitution not resulting from a final adjudication (say, a settlement) within the definition of ‘Loss.’”  The court distinguished cases – such as Level 3 Communications, Inc. v. Federal Insurance Co., 272 F.3d 908 (7th Cir. 2001) – cited by the insurers in support of their argument that restitution was uninsurable on the grounds that “they involved policies without a specific provision requiring a ‘final adjudication.’”

The insurers also argued that, because overdraft protection constitutes an extension of credit, the policies’ extension-of-credit carve-out from the definition of “Loss” precluded coverage.  The court rejected this argument on two grounds.  First, the court held that this argument was “overbroad” because the carve-out was specifically designed to prevent the insured from procuring coverage for losses from unpaid loans, not losses from overdraft protection, and “untenable” because its application would bar coverage for any professional-liability claim relating to the insured’s lending operations.  Second, the court maintained that, given that the underlying actions alleged that overdraft fees were charged against transactions while there were still positive balances in customers’ accounts, the settlement was not based on an extension of credit.