On July 3, 2014, in an interesting decision that is sure to stir up much discussion and controversy, District of Minnesota Judge Paul Magnuson, applying Delaware law, held that U.S. Bank was entitled to coverage under its professional liability insurance for restitutionary amounts it paid in settlement of an overdraft fee overcharge class action. The Court held that there is no Delaware public policy against insuring restitutionary amounts and that the “after adjudication” requirement of the ill-gotten gains exclusion implies coverage for restitutionary amounts in the absence of an adjudication. A copy of the July 3 Opinion can be found here.
In 2009, U.S. Bank was sued in a series of class action lawsuits in which the claimants alleged that the bank had improperly charged overdraft fees to its customers and that it had misrepresented its overdraft fee policy. The claimants asserted a variety of common law and statutory claims and sought the return of the excess overdraft fees. In 2013, U.S. Bank settled the class actions for $55 million.
U.S. Bank then sought coverage from its professional liability insurers for its defense costs and for settlement amounts in excess of the primary policy’s retention. The insurers denied coverage on the ground that the settlement was restitutionary in nature and that restitution is uninsurable as a matter of law. U.S. Bank filed an action against its insurers in the District of Minnesota alleging breach of contract and seeking a judicial declaration that the settlement and defense costs are covered. The insurers filed a motion for judgment on the pleadings.
The primary policy’s definition of the term “Loss” contained a provision (which the Court called the Uninsurable Provision) that “Loss” does not included “matters which are uninsurable under the law pursuant to which the Policy is construed.” The definition of “Loss” also specified (in a provision that the Court called the Extension-of-Credit Provision) that “Loss” does not include “principal, interest or other monies either paid, accrued or due as a result of any loan, lease or extension of credit” by the bank.
In addition, in an exclusion the Court called the Ill-Gotten Gains Provision, the primary policy precluded from coverage claims “brought about or contributed to in fact by any … profit or remuneration gained by [U.S. Bank] or to which [U.S. Bank] is not legally entitled … as determined by a final adjudication in the underlying claim.”
The July 3 Opinion
In his July 3 Opinion, Judge Magnuson denied the insurers’ motion for judgment on the pleadings. Judge Magnuson rejected the insurers’ arguments that the restitutionary settlement was precluded from coverage as a matter of law.
First, Judge Maguson rejected the insurers’ argument that the settlement is uninsurable, “because no Delaware authority has held that restitution is uninsurable as a matter of law.” He added that “neither Delaware statute nor case law expressly precludes insurance coverage for settlements constituting restitution.” In response to the insurers’ various arguments about how a Delaware court might rule or might consider rulings from other jurisdictions holding restitution to be uninsurable, Judge Magnuson said that “the Court finds none of these reasons compelling enough to support holding as a matter of first impression that Delaware law prevents parties from contracting to insure settlements constituting restitution.”
Second, Judge Maguson found that “the policies exclude from coverage restitution resulting from a final adjudication and by implication include within coverage restitution stemming from a settlement.” In this case, where the class actions were settled, “there is no final adjudication and the settlement is not excluded from coverage.” The insurers tried to argue that if there hasn’t been an adjudication, that means that the provision is simply irrelevant; it doesn’t mean that the provision implicitly establishes coverage. Judge Magnuson rejected this argument because its logical extension is that there could never be coverage for restitution, by operation not of the exclusion but rather of the Uninsurable Provision. He said that “to interpret the Uninsurable Provision to always preclude coverage for restitution would nullify the Ill-Gotten Gains Provision, which plainly says that only a final adjudication precludes coverage for restitution. The provision must have effect.”
Judge Magnuson also rejected the insurers’ attempt to rely on the “no loss” line of cases. These cases, the first of which was the Seventh Circuit’s 2001 decision in Level 3 Communications, Inc. v. Federal Insurance Co., hold that an insured incurs no loss when it unlawfully takes money or property and is forced to return it, and that to allow insurance for these amounts would bestow an unjustified windfall. Judge Magnuson found that these cases are distinguishable because they involved policies without a specific provision requiring a “final adjudication.” He added that the parties knew about the Level 3 decision when they executed policies and still decided to cover a settlement constituting restitution absent a final adjudication.
Finally, Judge Magnuson rejected the insurers’ argument that the Extension-of-Credit Provision precluded coverage for the settlement amounts because the underlying claim was based on the bank’s improper overdraft fee practices and not on an extension of credit.
I am guessing that the management liability insurance claims departments are buzzing about this decision. For many years, at least since the Seventh Circuit’s Level 3 decision, it has been a basic claims handling assumption that professional liability and management liability insurance policies do not cover restitutionary amounts and that insurance for restitution is against public policy. This decision knocks those assumptions in the head.
To be sure, Judge Magnuson said only that he could find no Delaware law for the proposition that restitutionary amounts are uninsurable as a matter of law in that state. That ruling obviously has no bearing in cases to which other jurisdictions’ law apply and where there is law barring the insurance of restitutionary amounts. Moreover, as a federal trial court decision interpreting a nonforum state’s law, this decision has no precedential authority – yet, at least until a Delaware court says that there is a public policy in Delaware against insuring restitution, it will have an impact just the same.
What makes the case particularly interesting is Judge Magnuson’s interpretation of the Ill-Gotten Gains Provision and his rejection of the “no loss” line of cases. Since the time period when Seventh Circuit ruled in the Level 3 cases, most professional and management liability insurance policies have been modified to incorporate an after adjudication provision in their improper profits exclusion. Judge Maguson’s conclusion that the “no loss” line of cases are distinguishable based upon the exclusion’s after adjudication provision has significant implications for insurers, as most of their policies’ improper profit exclusions now have an after adjudication requirement. The suggestion that insurers whose policies have this provision by implication insure restitution in the absence of an adjudication and might not be able to rely on the “no loss” line of cases undoubtedly will be disturbing revelations for many insurers.
As unexpected as this case is, I do think there may be a limit to which other courts might be willing to follow it, even without the questions about precedential authority and effect. I think many courts may be (and will continue to be) reluctant to conclude that that restitutionary amounts are insurable. The many cases in which courts have refused to allow restitution to be insured are a reflection of some courts’ fundamental discomfort with allowing insurance for amounts a party has gained improperly and been forced to return.
That said, many insureds undoubtedly will now try to rely on Judge Magnuson’s conclusion that in the absence of an adjudication coverage exists for restitutionary amounts. To the extent other insureds gain traction on this theory, the insurers may have to think about expressly providing in their policies that “Loss” does not include amounts paid in restitution.
Many thanks to a loyal reader for providing me with a copy of Judge Magnuson’s opinion.
PLUS Webinar on the Halliburton Decision: On Monday July 14, 2014, at 12:30 pm EDT, the Professional Liability Underwriting Society will be hosting a free webinar on the U.S. Supreme Court’s recent Halliburton decision and its implications for publicly traded companies and for their D&O insurers. This 45-minute webinar will feature Jordan Eth of the Morrison Foerster law firm, Mike Dowd of the Robbins Geller law firm, and Michael Nicholai of Berkley Professional. Registration information about the webinar can be found here.
Time for Nominations to the ABA Journal’s Annual Blawg 100: It is once again time for nominations to the ABA Journal’s annual list of the top 100 law blogs. Everyone should take a moment to nominate their favorite law blogs for inclusion in the list. I would be humbled if any reader would be willing to nominate my blog for inclusion. Nominations can be made here. Don’t delay, nominations are due by 5:00 pm EDT on Friday August 8, 2014.