Fee Exclusion Bars Coverage for Overdraft Fee Settlement

Applying Mississippi law, the United States Court of Appeals for the Seventh Circuit has held that an exclusion in a bankers’ professional liability policy barred coverage for class claims alleging that the insured bank wrongfully maximized overdraft fees charged to its customers.  BancorpSouth, Inc. v. Federal Ins. Co., 2017 WL 4546144 (7th Cir. Oct. 12, 2017).  The court also concluded that the bad faith claim against the insurer failed because of the absence of coverage in the first instance.

In May 2010, a class of customers sued the bank, claiming that the bank manipulated checking accounts to unfairly charge overdraft fees.  The parties settled in February 2016, and the bank agreed to pay $24 million to the class plaintiffs.  The bank’s professional liability carrier denied coverage for the underlying suit based on an exclusion in the policy that bars coverage for any claim “based upon, arising from, or in consequence of any fees or charges.”

The bank argued that the allegations in the underlying complaint concerning the bank’s general banking policies and procedures were the primary sources of harm alleged rather than fees.  The court determined that “individual allegations cannot be read in a vacuum” and that “there is no policy or practice alleged that exists independent of the overdraft fee scheme.”  In support of this conclusion, the court found persuasive a decision from the Third Circuit which held that, based on a similar fee exclusion, an insurer had no duty to indemnify where the essence of the underlying claims resulted from the insured’s practice of charging overdraft fees.  PNC Fin. Servs. Grp., Inc. v. Houston Cas. Co., 647 F. App’x 112 (3d Cir. 2016).  Because the “essence” of the underlying claim was the bank’s “maximization of overdraft fees,” the court held that the fee exclusion barred coverage.  The court added that an insurer’s decision to include a fee exclusion in a banker’s liability policy serves the purpose of avoiding the “moral hazard” of allowing banks to profit from fraudulent fee schemes.

Finally, the court concluded that the bank’s bad faith claim failed because Mississippi law requires a plaintiff to establish coverage of the underlying claim as a predicate to a bad faith claim.