A recurring question under the management liability insurance protection that banks typically acquire is the extent of the protection afforded under their policies’ professional liability provisions. One particular question that often arises is whether the policy affords coverage for customers’ excessive overdraft fees claims.. An August 7, 2013 decision by Northern District of Georgia Judge Richard W. Story, applying Georgia law, held that a bank’s policy did not cover the settlement of a customer overdraft fee class action. A copy of Judge Story’s opinion can be found here. An August 9, 2013 post on the Class Action Lawsuit Defense Blog about the decision can be found here.
Fidelity Bank was sued in Georgia state court in a customer class action alleging that the bank’s flat $29 overdraft fee, charged regardless of the size of the overdraft, amounted to a usurious interest charge in violation of Georgia law. The bank tendered the overdraft fee suit to its insurer, which had issued a Management and Professional Liability Insurance for Financial Institutions policy to the bank. The insurer accepted the defense of the claim, but denied coverage for any settlements or judgment amounts. The bank settled the underlying claim and filed an action seeking a judicial declaration that the policy covered the settlement amount. The parties filed cross-motions for summary judgment.
The relevant portion of the policy provided coverage, among other things, for loss arising from a claim alleging a wrongful act of the insured “in the rendering of the failure to render professional services.” The policy defines professional services as services “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 of the Company.”
Policy Exclusion (h) specifies that the insurer is not liable to make payment for loss “alleging, arising out of, attributable to, directly or indirectly, any dispute involving fees, commissions or other charges for ay Professional Service rendered or requiting 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; provided, however, that this exclusion shall not apply to Defense Costs incurred in connection with a Claim alleging a Wrongful Act.”
In his August 7, 2013 opinion, Judge Story granted the insurer’s motion for summary judgment, on two grounds: first, that the underlying settlement represents uninsurable restitution; and second, that Exclusion (h) excludes coverage for loss arising out of fee disputes, other than defense costs.
First, with respect to the restitution issue, Judge Story said that the money at issue in the underlying dispute did not represent amounts the bank had lost, for example by negligently negotiating a forged check. Rather, Judge Story noted, the allegation was that “Plaintiff was deducting to its own use funds from its customers’ accounts in a manner that was not legally authorized.” Because of the underlying lawsuit, the bank “was required to return to return its customers’ funds in the same manner that it would if Plaintiff has mistakenly deducted funds from a customer’s account because of, for example, a computer error.”
Judge Story added that to require the insurer to “pay restitution for amounts Plaintiff collected pursuant to illegal practices would result in a windfall to Plaintiff.” If the Court were to require the insurer to make a payment in these circumstances, “it would amount to a ruling that Plaintiff is free to collect fees and make profits from its customers through illegal conduct, and the insurer is on the hood when the customers sue while Plaintiff keeps the ill-gotten gains.”
Judge Story also held that Exclusion (h) “speaks exactly to this type of claim” because it “excludes from indemnification (but not defense) disputes involving fees and commissions or, in other words, amounts that Plaintiff was accused of wrongfully or excessively charging its customers.” Judge Story acknowledged that the plaintiffs in the underlying lawsuit had referred to the overdraft fees as “usurious interest,” but, he said, “the fact that Georgia law treats a fee as interest in a certain context does not mean that it cannot also be a fee.”
The outcome of this insurance coverage dispute is noteworthy not only in and of itself, but also because plaintiffs’ lawyers are filing a host of overdraft fee class actions these days, and so the question of insurance coverage is coming up with some frequency. Obviously coverage will depend in part on the nature of the fees charged and the facts alleged and claims asserted in the underlying lawsuit, as well as the wording of arguably applicable exclusions if any. Nevertheless, despite these case and circumstance specific factors, insurers’ are likely to rely on this case to try to argue that their policy does not cover the amount of any settlement of a customer overdraft fee class action.