On December 16, 2014, in an interesting ruling that undoubtedly will stir up a great deal of debate, District of Minnesota Judge Paul Magnuson, applying Delaware law, granted U.S. Bancorp’s motion for summary judgment, holding that the bank’s professional liability insurers must pay $30 million of the $55 million the bank agreed to pay in settlement of overdraft fee overcharge class action lawsuits, plus related defense fees. A copy of Judge Maguson’s memorandum opinion can be found here.
Judge Magnuson rejected the insurers’ argument that coverage for the settlement was precluded as a matter of public policy because the underlying claims for repayment of the overcharges were restitutionary in nature. Judge Magnuson ruled that the “after adjudication” requirement of the policy’s ill-gotten gains exclusion implies coverage for the settlement of disputed claims for restitutionary amounts, where there has been no adjudication that the amounts involved were wrongfully taken.
Insurers contend (and indeed assume) that professional liability policies and management liability policies do not cover restitution. Indeed, Judge Magnuson was willing to assume for purposes of his opinion that restitutionary amounts are not covered. The question Judge Magnuson addressed was whether the policies at issue provided coverage for the settlement of claims for restitutionary amounts, where there had been no determination that the amount to be paid constituted a restitution. In a ruling that undoubtedly will prove controversial in claims departments everywhere, Judge Magnuson held that under policies with an adjudication requirement, coverage is available for settlements of restitutionary claims in the absence of an adjudication.
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.
U.S. Bank submitted the overdraft fee class action lawsuits as claims under its professional liability insurance policies. U.S. Bank maintained a program of professional liability insurance with total limits of $35 million, consisting of a primary policy of $20 million and an excess policy of $15 million. The primary policy was subject to a $25 million deductible. The insurers denied coverage on the ground that the amounts claimed in the overdraft fee overcharge class actions were restitutionary in nature and that restitution is uninsurable as a matter of law.
U.S. Bank reached an agreement to settle the underlying lawsuit for a total payment of $55 million. The insurers provided consents to the settlement subject to a reservation of their rights under the policies to later contest coverage. In connection with the settlement, U.S. Bank did not admit liability, nor did the settlement characterize the settlement payment as restitution.
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.”
As discussed here, on July 3, 2014, Judge Magnuson denied the insurers’ motion for judgment on the pleadings. Judge Magnuson rejected the insurers’ arguments that the settlement was precluded from coverage as a matter of law. Judge Magnuson, reading the Uninsurable Provision in light of the Ill-Gotten Gains Provision, reasoned that “the policies exclude from coverage restitution resulting from a final adjudication and by implication include within coverage restitution stemming from a settlement.” 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 Maguson rejected the insurers’ motions for reconsideration and motion to have questions of law certified to the Delaware Supreme Court. U.S. Bank then moved for summary judgment on the question of coverage for the amount of the settlement in excess of the deductible as well as for the related defense costs.
The December 16 Summary Judgment Ruling
In his December 16, 2014 opinion, Judge Magnuson granted U.S. Bank’s motion for summary judgment, holding that the policy language at issue was “unambiguous” and that there were no disputed issues of material fact. He held that the bank is entitled to recover from the insurers of $30 million of the settlement in excess of the applicable deductible amount as well as related attorneys’ fees.
Although the insurers could not identify case law holding restitution to be uninsurable as a matter of Delaware law, Judge Maguson nevertheless was willing to assume without deciding for purposes of his ruling that restitution is uninsurable as a matter of law in Delaware. However, the “crux of the dispute,” he said, is not really whether or not restitution is uninsurable bur rather “whether the settlement constitutes restitution.” Judge Magnuson ruled that it does not.
Based on the presence of the adjudication requirement in the Ill-Gotten Gains Exclusion, Judge Magnuson said that “the policies unambiguously require that a final adjudication in the underlying action determine that a payment is restitution before the payment is barred from coverage as restitution.” He reasoned that “the settlement is not a payment that a final adjudication in the underlying action determined is restitution” because there has been “no final adjudication in [the underlying litigation] determining that the gains were ill-gotten and ordering the return of those gains.”
He added that the court “will not automatically presume – as the Insurers do – that the settlement constitutes restitution because it resolved claims alleging ill-gotten gains and seeking disgorgement of those gains,” noting that “if a settlement resolves claims alleging unlawful activity but excludes an admission of liability for the activity, it does not establish that the underlying allegations are true or false.”
He noted further that “under a policy with an after adjudication requirement, mere allegations are insufficient. If allegations of unlawful activity are never determined to be true, a payment to dispose of those allegations is not restitution because restitution can only occur if that which is being returned was wrongfully taken.”
Judge Magnuson rejected the insurers’ attempt to rely on the “no loss” line of cases, such as the Seventh Circuit’s opinion in the Level 3 case, which hold that a policyholder that returns amounts to which it was never entitled suffered no loss. Judge Magnuson rejected the relevance of these cases based on his determination that those cases are distinguishable because they did not involve Ill-Gotten Gain Exclusions with an after adjudication requirement. Judge Magnuson even rejected the relevance of cases applying the “no loss” principles where the applicable policies’ exclusions had “after adjudication” provisions because the courts in those cases had “failed to otherwise analyze the impact of the final-adjudication requirement.”
Judge Magnuson also rejected the insurers’ argument that to allow coverage for the settlement of restitutionary claims would “incentivize banks to settle rather than to litigate these types of lawsuits to obtain coverage for restitution.” He said that if the insurers were concerned that the settlement constituted restitution, they “could have refused consent or conditioned consent on an admission of liability for wrongdoing or a stipulation that that the payment was restitution.”
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.
In light of Judge Magnuson’s July ruling on the insurers’ motion for judgment on the pleadings, his ruling on the bank’s summary judgment motion arguably comes as no surprise. In many ways, his summary judgment opinion is simply a recapitulation of his earlier opinion on the insurers’ prior motion. However, while the outcome of the summary judgment motion arguably was preordained by his prior ruling, that does not mean the outcome of this case is not a surprise, at least for those in the claims departments of professional liability insurers and management liability insurers.
It has been a basic operating assumption for some time within these insurance claims departments that their companies’ policies do not cover restitutionary amounts. Within this assumption was the further assumption that this coverage prohibition extended not only to judgments requiring restitution (or disgorgement), but also to settlements of claims for restitution (or disgorgement).
The insurers in this case undoubtedly will seek to appeal Judge Magnuson’s ruling in this case, so there could be more of this story to be told before the outcome is certain. But even though this case may have further to go, Judge Maguson’s rulings so far have important implications that the insurers will have to consider.
The fact is that most professional liability and management liability claims settle without an adjudication. Up until now, insurers may have been secure in their belief that their policies do not cover even settlements of claims for restitutionary amounts. Judge Maguson’s rulings in this case clearly suggests that even if we can all agree that these kinds of policies do not cover restitutionary amounts, the policies – or at least those with after adjudication clause in their ill-gotten gains exclusions – may well cover settlements of claims for restitutionary amounts where there has been no adjudication of wrongdoing.
The significance of the after adjudication requirement in the ill-gotten gains exclusion is magnified by the fact that these days the equivalent exclusions in most professional liability policies and management liability policies have adjudication requirements. Insurers who up to this point may have felt secure in their belief that their policies did not cover settlement of claims seeking restitution will now have to consider whether their policy language will need to be changed. However, in light of Judge Magnuson’s analysis, it would not be sufficient for the insurers simply to modify their policy’s definition of loss to provide that “Loss” shall not include restitutionary amounts or disgorgement. Even if the insurers were to make this change to the policy definition, the presence of the after adjudication requirement would still arguably require the insureres’ payment under their policies of the settlement of claims for restitution in the absence of an adjudication of wrongdoing.
Nor is it an easy option for the insurers simply to remove the adjudication requirement from the ill-gotten gains provision, at least in the current marketplace environment. The fixture of the adjudication requirement in the conduct exclusions in these kinds of policies is the result of a hard-won, multiyear battle between policyholder representatives, on the one hand, and insurers’ representatives, on the other hand. Having won this battle over the course of many years, to the point that the adjudication requirement is now a basic provision in most insurers’ base policies, policyholders and their representatives are not going to simply sit back and take it if the insurers’ were to now try to remove the adjudication requirements. The restriction of coverage that the removal of the adjudication requirement might represent would be an unacceptable development and in a highly competitive marketplace any insurer trying to make this change would quickly find its premium revenue going elsewhere.
Focusing solely at the issues involved in this case, it seems to me that there is a relatively straightforward way for insurers determined not to provide coverage for amounts paid in settlement of claims for fee overcharges to avoid coverage for those amounts. That is, the insurers could specify that the policy does not provide coverage for any loss based on or arising out of claims that the insured improperly charged or over charged fees or other amounts. (Although in this marketplace even this tailored type of exclusion might prove competitively impractical.)
Even if the insurers could manage some kind of fee-dispute exclusion, that would not address the larger concern that the carriers don’t want to find themselves on the hook for amounts policyholders agree to pay in settlement of restitutionary claims. Insurers quite simply will not want to have their policies called upon to fund the resolution of claims that their insureds’ wrongfully obtained or withheld amounts from third-parties. But unless and until the carriers can figure out a way around the logical conundrum that the presence of the adjudication requirement in the ill-gotten gains exclusion creates, they may well find themselves called upon to contribute toward settlement of restitutionary claims.
It will in any event be interesting to see what happens on appeal in this case. One place the insurers may want to start as they think about the arguments to raise on appeal is Judge Maguson’s rejection of the insurers’ argument that the ruling in this case will incentivize defendants to settle rather than litigate restitionary lawsuits in order to secure insurance coverage for the restitution. In the Level 3 case, the Seventh Circuit had said that “it can’t be right” that coverage for restitution could pivot on whether the case was resolved by settlement or adjudication because the insured, “seeing the handwriting on the wall,” could simply agree “to pay the plaintiffs in the fraud suit all they were asking for” and “retain the profit it had made from the fraud.”
Judge Magnuson said that insurers could avoid this problem by refusing consent to the settlement or conditioning consent on an admission of liability for wrongdoing or a stipulation that the payment was restitution. With all due respect, these suggestions are impractical. Insurers that throw roadblocks into settlement discussion or that try to condition settlement consent on such unlikely things as admissions of wrongdoing or stipulations of restitution would very quickly find themselves embroiled in bad faith litigation and facing arguments that they should be held liable for the entire amounts of settlements in excess of the policy limits for their refusal to consent to settle. No insurance claims department could consider conducting itself the way Judge Magnuson suggests. On appeal, the insurers can seek to cite the concerns the Seventh Circuit noted while also seeking to undercut the sufficiency of the basis on which Judge Magnuson rejected these concerns. (Of course, this argument really does not avoid the analytical problem relating to the policy’s adjudication requirement.)
I suspect that this case will stir up some strong responses for many of this blog’s readers. I urge readers who have opinions to add their thoughts to this post using the blog’s comment feature.
Many thanks to a loyal reader for calling my attention to this ruling and for providing me with a copy of Judge Magnuson’s opinion.