Bank’s Overcharging Customer Fees on Overdraft Accounts Not Covered by Professional Liability Insurance Policy and Insurer Granted Judgment in Coverage Dispute

On August 7, 2013, a federal district court in Georgia ruled a bank was not entitled to insurance coverage for a settlement entered into with customers, the plaintiffs in a class action lawsuit (the underlying suit), in which the bank settled with the plaintiffs on charges of wrongfully overcharging for overdraft fees.  Fidelity Bank v. Chartis.U.S.D.C Ga. August 7, 2013.

The bank would charge a fee of $29 each time a customer sought to pay by check or debit an amount in excess of the balance on his or her account.  The $29 fee was charged regardless of the amount of the overdraft created.  So, for example, if a customer with $1.30 on his or her account purchased a cup of coffee for $2.00, the bank would cover the purchase, and then charge its customer $29 in addition to the amount of the purchase (sometimes called a convenience fee / overdraft protection fee, etc.).

The plaintiffs filed suit in Georgia against the bank, alleging violation of Georgia’s civil and criminal usury statutes, common-law conversion, and a common-law claim for “money had and received”.

The insurer had issued a professional liability policy to the bank. The bank notified the insurer of the underlying lawsuit, tendered the claim, and requested defense and indemnity.  The insurer undertook the defense, but refused under a reservation to concede coverage.

The bank entered into a settlement with the plaintiffs in the underlying suit.  The bank then filed a declaratory judgment action seeking a declaration of its rights vis-a-vis the insurance company regarding coverage under the policy.

The policy’s coverage portion provided the insurer would pay the loss of insureds arising from a claim for “any wrongful act of the insured in the rendering of or failure to render professional services”.  The policy defined the term “wrongful act” as “any actual or alleged breach of duty, neglect, error, misstatement, omission or act by the [bank].”  The policy further defined “professional services” as “those services…as set forth in an endorsement to this policy…which services are permitted by law or regulation, to be rendered by an insured pursuant to a written agreement with the customer or client as long as such service is rendered for or on behalf of a customer or client…in return for a fee, commission or other compensation.”

Further, relevant to the case, the policy contained an “exclusion”, which provided the insurer would not be liable “to make any payment for loss in connection with any claim made against any insured…alleging, arising out of, based upon or attributable to, directly or indirectly, any dispute involving fees, commissions or other charges for any Professional Service rendered or required to be rendered by the Insured, or that portion of any settlement or award representing an amount equal to such fees, commissions or other compensations….”. (emphasis added).

The insurer moved for summary judgment, arguing first the policy’s terms did not provide coverage for the claims in the underlying suit. Second, the insurer advanced the alternate argument that coverage was “excluded” based on the language of the exclusion cited above.

The insurer advanced four principal arguments in support of its motion for judgment.  First, it argued the bank’s decision to charge overdraft fees was a deliberate business decision, not a “wrongful act” as defined and applied by the policy.  Second, the insurer argued the underlying lawsuit did not allege claims implicating the bank’s “professional services” as defined and applied by the policy’s terms.  Thus, the claims in the underlying suit were not covered because they were not “wrongful acts”  and therefore the claims were not covered because they were not “wrongful acts” committed in the process of the bank’s rendering of “professional services”.

The insurer also argued what the bank really sought was restitution for its payment to the plaintiffs in settlement; damages which were uninsurable as a matter of law.  Finally, the insurer argued the policy explicitly excluded coverage for amounts paid out to indemnify customers over disputes regarding fees charged by the bank.

The district court grants judgment for the insurer, on the basis of the third and fourth arguments noted above.  (Later on in the opinion, at pages 9 and 10, the court notes it disagrees that the claims did not involve “wrongful acts” for “professional services”, as urged by the insurer in its first two arguments – more on this in a moment).

First, the district court reasons that to require the insurer to pay for a loss the bank incurred in essentially repaying (through settlement of the underlying lawsuit) its customers the overdraft fees would amount to restoring to the bank funds it had taken from its customers’ accounts (and which the bank and subsequently repaid to the customers).  In this vein, the court stated:  “To require [the insurer] to pay restitution for amounts [the bank] collected pursuant to illegal practices would result in a windfall to [the bank].  If this Court were to require [the insurer] to indemnify [the bank] under these facts, it would amount to a ruling that [the bank] is free to collect fees and make profits from its customers through illegal conduct, and the insurer is on the hook when the customers sue while [the bank] keeps the ill-gotten gains.”  Slip. Op. at 6.  The court cites to opinions in other jurisdictions holding that restoration or restitution is not equivalent to damages; damages do not include property or money that is required to be returned to its rightful owner; such restitution or restoration is not a “loss” suffered by the insured and therefore it is and should not be insurable because to so hold would entitle the bank to return of amounts to which it was never entitled).  Id. at 6-8.

The Court then goes on to analyze the exclusion.  After engaging in the unnecessary aforementioned analysis of “coverage” under the policy, the Court evidently realizes the import of the exclusion, which it declares:  “speaks to exactly this type of claim”.  Recall that the exclusion precluded coverage for claims involving fee disputes.

The court disagrees with the plaintiff’s argument that an endorsement to the policy provided coverage despite the exclusion because the endorsement applied to the servicing of loans, and included ostensible coverage for “extensions of credit” (which the bank asserted included extending credit to pay amounts in excess of the amount in a customer’s account).

While the result of this opinion is correct, it is so based on the language of the exclusion, solely and alone.  The court here engaged in needless and confusing discussion about “coverage” and the terms of the coverage portion of the policy, rather than simply analyzing the exclusion.  To be sure, one must always first consider whether a policy’s “terms of coverage” are applicable to the underlying claims.

Careful insurance coverage counsel, and/or those challenging an insurance company’s determinations regarding coverage know the established “order of priority” when analyzing coverage disputes. First, after determining all of the conditional prerequisites of notice and claim are satisfied, and depending on the type of policy (claims made or “occurrence” based), one must then carefully peruse the precise terms of “coverage” as applied to the underlying claims and the nature of the facts being alleged.

The court rescues its oversight on pages 9 and 10 of the opinion by going back and showing that the “terms of coverage” in the policy clearly would have applied to the claims in the underlying suit.  The fees were charged within the boundaries of law and regulation, and the terms of the bank’s written agreement with its customers.  (Again, the underlying lawsuit resulted in a “settlement” by and between the bank and its customers – part of which was obviously recompense for the alleged overcharge fees.  So, there was also no need for the district court to engage in unnecessary dicta about the illegality or unlawfulness of the conduct in question – this is not a “conspiracy” or “intentional fraud” claim or case).  This clouds the discussion about the nature of “professional liability policies” and whether and to what extent coverage extends in the given case.  Contrast this underlying set of facts with those at issue in the blog post I earlier submitted: Errors and Omissions Policies Do Not Cover True Conspiracies / Schemes to Defraud Providers and Patients

Notwithstanding these unnecessary discussions by the court in the instant case, as every coverage counsel knows, coverage is not the end of the inquiry.  Here, the exclusion’s plain language clearly applies to exclude coverage for otherwise covered claims for “wrongful acts” in the provision of “professional services” if such arise out of a dispute concerning the precise type of overdraft fees the bank was charging.

However, something that appears to have been overlooked by the court is the exclusion excludes coverage only for that portion of any settlement or award representing an amount equal to such fees, commissions or other compensations….” (emphasis added).  If I were advocating for the bank, and applying the proper analytical framework to engaging the order of priority in the policy, I would assert there is a clear separation in the exclusion for “true damages” arising out of “covered claims”, those representing true losses by the bank, whether by way of compensatory damages realized by the claimants after suit, or such an amount as was represented in the settlement, and simply payments made in restitution (which the court here explains is against common law and policy – and, ultimately, realizes this precise policy (not insuring against what are not true losses) is the purpose of the exclusion itself).

Perhaps partial summary judgment was appropriate, leaving it to be factually determined whether coverage should still be available based on the separation in the amounts paid in settlement that represented compensation (compensatory damages), and the amount paid back to the plaintiffs for return of their property (those amounts the banks charged to (and received from) the plaintiffs’ accounts).

If you would like more information about these issues contact Carson J. Tucker, Chair of the Appeals and Legal Research Group and the Insurance Coverage and Recovery Group at Lacey & Jones, LLP.

Lacey & Jones, LLP’s Insurance Coverage and Recovery Group

Continuing its tradition of providing highly specialized and unique legal services to an exclusive clientele, Lacey & Jones, LLP, works with insurance companies and businesses to develop comprehensive insurance coverage strategies for all lines of coverage.  From the simplest review (second look) of an in-house counsel’s coverage determination to complete coverage analysis involving high-exposure, multi-party, multi-jurisdiction, multi-claim events, the firm is capable of assisting its clients in making valuable choices and advising them on the proper course of action.  The firm’s coverage counsel and litigation team is also capable of pursuing coverage determinations and indemnity or subrogation in courts by filing declaratory judgment actions or indemnity and subrogation actions, respectively.

Our attorneys have successfully navigated coverage cases in state and federal courts, involving multiple insurers, multiple claimants and multiple forums to arrive at favorable resolutions for our clients in eight figure exposure cases, including, but not limited to, environmental liability claims, construction claims, professional liability claims, catastrophic personal injury claims, and product liability claims.  Our coverage lawyers speak the language of insurers and understand the intricacies of policy coverage involving multiple insurers, multiple policy forms, and multiple layers and years of coverage.

    • Declaratory Judgment Actions
    • Coverage Analysis and Strategy
    • Property and Casualty Claims
    • General Liability Claims
    • Business Risk
    • Indemnity and Subrogation
    • Product Liability Claims
    • Construction Defect Claims
    • Government and Municipal Liability Claims
    • Workers’ Compensation Claims

About cjtucker06

Owner of law firm since July 2014; Handles all types of appellate matters and assists other lawyers with complex litigation and insurance coverage issues; Admitted to the Supreme Court of the United States, the Sixth Circuit Court of Appeals and the State Bar of Michigan; Expertise in prosecuting and defending appeals with several significant successes in the Sixth Circuit Court of Appeals, the Michigan Supreme Court and the Michigan Court of Appeals; Author of briefs amicus curiae in the Michigan Supreme Court for the Michigan Defense Trial Counsel and the Insurance Institute of Michigan; Represents Insurance Companies, Major International Business, Governmental Entities, Law Enforcement Officers and County Sheriffs. Board of Directors, Michigan Defense Trial Counsel Amicus Committee Co-Chair, Michigan Defense Trial Counsel Military - Retired Major in the Judge Advocate General (JAG) Corps of the United States Army, Brigade Judge Advocate and Staff JAG officer for the Maneuver Training Center, Camp Grayling, Michigan; Recipient of the Army's Meritorious Service Medal (the highest medal of honor available to Soldiers serving in non-combat roles); 2012 Graduate of the Judge Advocate Officer Advanced Course, at The Judge Advocate Legal Center and School, Charlottesville, Virginia. United States Navy Reserves, Combat Warfare Qualification, January 1989 to July 2003 Former law clerk to Justice Stephen J. Markman, Michigan Supreme Court, Research Attorney, Michigan Court of Appeals. Insurance Coverage Associate Plunkett Cooney; Environmental Law Attorney at Squire Sanders, now Squire Patton Boggs; Master's Degree in Environmental Law; Environmental Law Scholar, ALI/ABA Washington, D.C., Juris Doctorate, Vermont Law School, Environmental Editor, Vermont Law Review; Treasurer and Finalist, Moot Court Advisory Board.
Gallery | This entry was posted in Comparative Law, Errors and Omissions, General Liability, Insurance and Indemnity, Professional Liability and tagged , , , , , , , , , , , . Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s