Indiana Federal Court Holds No E&O Coverage for Overdraft Fees Class Action

In its recent decision in BancorpSouth, Inc. v. Fed. Ins. Co., 2017 U.S. Dist. LEXIS 10817 (S.D. Ind. Jan. 26, 2017), the United States District Court for the Southern District of Indiana, applying Mississippi law, had occasion to consider the application of a fees or charges exclusion in a bankers’ professional liability policy.

Bancorp sought coverage an underlying class action lawsuit seeking monetary damages, restitution and declaratory relief arising from its practice of charging allegedly excessive overdraft fees imposed on its customers.  The suit claimed that Bancorp engaged in various schemes in an effort to ensure that such fees would be maximized.  Bancorp sought coverage for the underlying suit, but Federal denied coverage on the basis of an exclusion in its policy applicable to loss arising from any claim “based upon, arising from, or in consequence of any fees or charges.”

In the ensuing coverage litigation, Bancorp contended that Federal applied the exclusion in too broad a fashion.  Specifically, Bancorp argued that because the underlying lawsuit alleged that its policies and procedures caused the harms alleged by the class, one of which was the imposition overdraft fees.  In other words, Bancorp claimed that was at stake in the suit was its policies that resulted in overdraft fees, not the imposition of the fees itself.   Bancorp also argued that the exclusion was ambiguous since it was not clear whether the exclusion applied to fees payable by Bancorp or fees paid to Bancorp.

In considering the exclusion, the court noted two unpublished and diverging opinions: one from the Third Circuit, applying Texas law, in PNC Fin. Servs. Group, Inc., 647 Fed. Appx. 112 (3d Cir. 2016) and another by the Fifth Circuit, ironically applying Pennsylvania law, in First Comm. Bancshares v. St. Paul Mercury Ins. Co., 593 Fed. Appx. 286 (5th Cir. 2014).

In First Community, the court held that the class action complaint alleged overdraft fees, but that “the primary harm stemming from these allegations is that customers could not ascertain their account balances and could not plan spending, withdrawals, and deposits.”  The BancorpSouth court noted, however, that the facts and policy before it were factually distinguishable from First Community.  Whereas the class action in First Community sought damages as a result of the bank customers only having access inaccurate balances, the suit against Bancorp was targeted at specific practices allegedly in furtherance of Bancorp’s scheme to impose and maximize overdraft fees.

The court further noted, by contrast, that the class action at issue in PNC was factually similar to that filed against Bancorp.  There the Third Circuit rejected arguments similar to those raised by Bancorp; namely, that the underlying suit sought damages for PNC’s allegedly improper practices, not for the fees themselves.  The BancorpSouth court found this reasoning persuasive, concluding “there is no other way for us to construe [the exclusion] than to encompass the claims here.”

The court also considered Bancorp’s argument that the failure to distinguish between payments to or by Bancorp rendered the exclusion ambiguous.  The court rejected this argument, observing that the exclusion applied to both types of payments, but that its breadth should not be equated with ambiguity.

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