{"id":2914,"date":"2017-11-03T18:39:11","date_gmt":"2017-11-03T18:39:11","guid":{"rendered":"http:\/\/www.joneslemongraham.com\/blog\/?p=2914"},"modified":"2021-12-21T20:02:51","modified_gmt":"2021-12-21T20:02:51","slug":"brokers-and-risk-managers-beware-professional-liability-insurance-fee-exclusions-with-no-defense-costs-exception","status":"publish","type":"post","link":"https:\/\/www.joneslemongraham.com\/blog\/brokers-and-risk-managers-beware-professional-liability-insurance-fee-exclusions-with-no-defense-costs-exception\/","title":{"rendered":"Brokers and risk managers beware: Professional liability insurance \u201cfee\u201d exclusions with no Defense Costs exception"},"content":{"rendered":"

by: Chris Graham<\/a> and Shelly Hall<\/a><\/p>\n

\"\"<\/a><\/p>\n

Summary:<\/em> Today\u2019s post focuses on a recent Seventh Circuit decision, BancorpSouth v. Federal Insurance Co., No. 17-1425 (7th Cir. Oct. 12, 2017)<\/a>, affirming dismissal, for failure to state a legally viable claim, of a bank\u2019s complaint against an insurer for alleged breach of a duty to defend and pay for a $24 million settlement of a consumer class action alleging improper overdraft fees, and related \u201cbad faith.\u201d It involved a duty-to-defend policy and a broad \u201cfee\u201d exclusion and, although other policies provide otherwise, this one had no exception for Defense Expenses. At the end of this post, we discuss other cases involving similar issues, but with different policy wording and, in some cases, different results. If you\u2019re a broker or a risk manager, this case and those discussed at the end show why you should insist on a Defense Costs exception to a fee exclusion.<\/p>\n

The coverage suit:<\/em> In BancorpSouth,<\/em> a bank sued an insurer for breaching a contract by failing to defend a class action and pay for a related $24 million settlement and for bad faith. Citing the policy\u2019s exclusion \u201cfor Loss on account of any Claim \u2026 arising from \u2026 any fees or charges,\u201d the Southern District of Indiana, applying Mississippi law, dismissed the bank\u2019s complaint for failure to state a legally viable claim. Given the allegations in the complaint, the Court concluded that the insurer had no duty to defend. Because the duty to defend is broader than the duty to indemnify, moreover, the insurer had no obligation for the settlement; nor was there bad faith. The Seventh Circuit affirmed.<\/p>\n

Policy wording:<\/em> Subject to the policy\u2019s terms, the insurer agreed to \u201cpay, on behalf of an Insured, Loss on account of any Claim first made against such Insured during the Policy Period\u2026for a Wrongful Act committed by an Insured or any person for whose acts the Insured is legally liable while performing Professional Services, including failure to perform Professional Services.\u201d The duty-to-defend policy included a \u201cfee\u201d exclusion providing that the insurer \u201cshall not be liable for Loss on account of any Claim\u2026based upon, arising from, or in consequence of any fees or charges.\u201d \u201cLoss\u201d included \u201cDefenses Costs\u201d and settlement costs. But the fee exclusion had no Defense Costs exception.<\/p>\n

Class Action Complaint:<\/em> The bank customer\u2019s \u201copening allegation stated: \u2018This is a civil action seeking monetary damages, restitution and declaratory relief from [the bank] arising from its unfair and unconscionable assessment and collection of excessive overdraft fees.\u2019\u201d The complaint alleged that the bank \u201cmaximized the amount of overdraft fees it could charge customers through a variety of means, policies, and procedures\u201d including by \u201creorder[ing] debts from highest to lowest, instead of chronologically,\u201d \u201cfail[ing] to provide accurate balance information, and purposefully delay[ing] posting transactions,\u201d \u201cfail[ing] to notify customers of overdrafts, despite having the capability to ascertain at the point of sale whether there were sufficient funds in a customer\u2019s account,\u201d and \u201cfail[ing] to make their customers aware that they can opt out of [the bank\u2019s] overdraft policy upon request.\u201d The customer asserted counts for breach of contract, unconscionability, conversion, unjust enrichment, and violation of the Arkansas Deceptive Trade Practices Act. He also sought to represent a class of \u201c[a]ll customers in the United States who \u2026 incurred an overdraft fee as a result of the bank\u2019s practice of resequencing debit card transactions from highest to lowest.\u201d As relief, the customer, for himself and the class, sought a declaration that the bank\u2019s \u201coverdraft fee policies and practices\u201d were \u201cwrongful, unfair, and unconscionable,\u201d \u201c[r]estitution of overdraft fees,\u201d\u2018[d]isgorgement of ill-gotten gains,\u201d \u2018[a]ctual damages,\u201d \u2018[p]unitive and exemplary damages,\u201d \u201c[p]re-judgment interest,\u201d \u201ccosts and disbursements,\u201d and \u201cother relief\u201d as \u201cjust and proper.\u201d<\/p>\n

Duty to defend:<\/em> As is typical and as was the case under Mississippi law, whether the insurer had a duty to defend \u201cdepend[ed] upon the comparison of the language contained in the policy with the allegations contained in the underlying action.\u201d In this instance, it was about \u201ccompar[ing] \u2026 [the fee exclusion], which excludes from coverage any claim \u2018based upon, arising from, or in consequence of any fees or charges,\u2019 with the allegations in the [customer\u2019s] Complaint.\u201d That the complaint included allegations that didn\u2019t mention overdraft fees didn\u2019t matter. \u201c[T]hese individual allegations cannot be read in a vacuum, and instead, must be read in the context of the entire complaint.\u201d \u201cRead in its entirety, the only harm alleged by the [customer\u2019s] complaint is [the bank\u2019s] maximization of excessive overdraft fees on its customers.\u201d<\/p>\n

As the Court explained further:<\/p>\n

\n

The very first paragraph of the \u2026 Complaint specifically states that the crux of the lawsuit centers on [the bank\u2019s] “unfair and unconscionable assessment and collection of excessive overdraft fees.” Moreover, the complaint defines the class of plaintiffs as customers who “incurred an overdraft fee.” Finally, every claim for relief asserted is specifically premised on the imposition of overdraft fees. The bank argued that the insurer had a duty to defend inasmuch as, per the complaint, \u201cpolicies and procedures caused the customers’ alleged injuries, and [excluded] overdraft fees were one type of damages suffered as a result.\u201d<\/p>\n<\/blockquote>\n

Rejecting that argument, the Court explained: \u201cTo be sure, language focusing on \u2018overdraft policies and procedures\u2019 appears in a number of places, but it is always connected with the wrongful collection or imposition of overdraft fees.\u201d The bank also argued that the fee exclusion was ambiguous, inasmuch as it didn\u2019t say whether the \u201cfees\u201d were \u201cpayable to or by\u201d the bank. Rejecting that argument, the Court explained that the fee exclusion by its plain wording, broadly applied to a \u201cClaim \u2026 arising from \u2026 any fees or charges,\u201d whether paid by or to the bank. The Court also rejected the bank\u2019s argument that reading the fee exclusion as including overdraft fees paid by customers to the bank would make the \u201ccoverage for \u2018Defense Costs,\u2019 defined in the policy to include attorneys\u2019 fees, illusory.\u201d The Court explained that the \u2018exclusion has no effect on [the bank\u2019s] recovery of any attorneys\u2019 fees on account of claims that are based on something other than fees or charges, such as a claim based on the quality of services provided by [the bank].\u201d The Court also stressed that an insurer\u2019s \u201cdecision\u201d to include a fee exclusion in a professional liability policy \u201cserves a necessary purpose of avoiding \u2018moral hazard.\u2019\u201d Without the exclusion, the insured \u201ccould freely create other customer fee schemes knowing that they would be readily reimbursed by\u201d its insurer.<\/p>\n

Comments:<\/em> Here\u2019s a summary of other recent cases addressing coverage for overdraft class actions and issues similar to those in BancorpSouth:<\/em><\/p>\n

\u2022 Fidelity Bank v. Chartis Specialty Ins. Co., Civil Action No. 1:12-CV-4259-RWS (N.D. Ga. 2013)<\/a>, applying Georgia law, addressed a \u201cfee-dispute\u201d exclusion, applicable to \u201cLoss 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; provided, however, that this exclusion shall not apply to Defense Costs incurred in connection with a Claim alleging a Wrongful Act.\u201d Given the \u201cfee-dispute\u201d exclusion\u2019s Defense-Costs exception, the insurer funded the bank\u2019s defense of the overdraft class action. But it refused to pay the settlement. The District Court granted the insurer a summary judgment, holding that the settlement was uninsurable because the payments amounted to restitution and in any event fell within the fee-dispute exclusion.<\/p>\n

\u2022 U.S. Bank National Association v. Indian Harbor Insurance Company, Case No. 12-CV-3175 (PAM\/JSM) (D. Minn. Dec. 16, 2014)<\/a>, applying Delaware law, addressed exceptions to primary and excess policies\u2019 \u201cLoss\u201d definitions, for “[m]atters which are uninsurable under the law pursuant to which this Policy is construed” or “principal, interest, or other monies either paid, accrued, or due as the result of any loan, lease or extension of credit by [the bank]”; and an exclusion for “any payment for Loss in connection with any Claim made against [the bank] . . . brought about or contributed in fact by any . . . profit or remuneration gained by [the bank] to which [it] is not legally entitled . . . as determined by a final adjudication in the underlying action.\u201d The bank settled the underlying overdraft class action for $55 million, and sought coverage for $30 million of that amount plus defense expenses, excess of a $25 million deductible. The District Court granted the bank a summary judgment, rejecting the insurers\u2019 argument that the settlement was uninsurable as restitution. Without deciding whether restitution was insurable, the Court\u2014citing the \u201cfinal adjudication\u201d wording in the policies\u2019 ill-gotten gains exclusion\u2014explained that the \u201cpolicies 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.\u201d See Kevin LaCroix\u2019s December 22, 2014 D&O Diary blog post<\/a> for a detailed discussion of this aspect of this somewhat controversial decision. When procuring the policies, US Bank\u2019s broker and risk manager had no need to worry about a Defense Costs exception to a fee exclusion; there was no exclusion.<\/p>\n

\u2022 First Community Bancshares v. St. Paul Mercury Ins. Co., 593 F. App’x 286, 288 (5th Cir. 2014)<\/a> involved a fee-dispute exclusion for a claim “based upon, arising out of or attributable to any dispute involving fees or charges,\u201d with no Defense Costs exception, but with duty-to-defend wording. The Fifth Circuit, applying Texas law, affirmed a summary judgment for the bank and against the insurer holding that the insurer had a duty to defend. \u201cConstruing the [underlying class action] petitions liberally \u2026 at least some of the allegations \u2026 are not excluded by the fee-dispute exclusion.\u201d Some of the allegations\u2014\u201cregarding [the bank] providing misleading information on its account practices and customers\u2019 account balances–\u2026 do not have a causal connection to a disagreement that necessarily includes fees \u2026.\u201d As the Seventh Circuit in BancorpSouth stated: \u201cCrucial to the \u2026 [First Community] holding \u2026 was [the Fifth Circuit\u2019s] finding that the primary harm was not the assessment and collection of fees, but rather \u2018that \u201ccustomers could not ascertain their account balances and could not accurately plan spending, withdrawals, and deposits.\u2019\u201d In contrast, the BancorpSouth underlying class-action complaint showed that \u201cexcessive overdraft fees were the central and only harm\u201d; so there was no duty to defend or pay the settlement. Although the insurer in First Community was required to defend notwithstanding a fee-dispute exclusion with no Defense-Costs exception, it was only because plaintiff\u2019s complaint fortuitously included some allegations falling outside of that exclusion and the bank benefited from pro-policyholder rules for determining an insurer\u2019s obligations under a duty-to-defend policy. The bank in BancorpSouth had no such luck.<\/p>\n

\u2022 PNC Financial Services. Group, Inc. v. Houston Casualty Co., 647 F. App’x 112, 120 (3d Cir. 2016)<\/a> (not precedential) involved policies insuring \u201cLoss,\u201d meaning \u201cClaim Expenses\u201d and \u201cDamages\u201d\u2014defined as \u201ca judgment, award, surcharge, or settlement \u2026 and any award of pre- and post- judgment interest, attorneys\u2019 fees and costs,\u201d but with an exception for \u201cfees, commissions or charges for Professional Services paid or payable to an Insured\u201d (the \u201cProfessional Services Charge Exception\u201d). \u201cClaim Expenses\u201d (defense costs) for a fee suit, thus, weren\u2019t subject to the Loss definition\u2019s Professional Services Charge Exception or to any fee exclusion; so the insurer here would have been required to pay Claim Expenses exceeding a $25 million self-insured retention. The Third Circuit, applying Pennsylvania law, held that the $102 million paid by the bank to settle the underlying overdraft charge class actions (including $30 million for class counsel fees) fell within the Professional Services Charge Exception; defense expenses presumably fell within the $25 million self-insured retention. As the Seventh Circuit in BancorpSouth explained, the insurer in the PNC case had no duty to indemnify the insured where \u201cthe class was defined as those who incurred an overdraft fee\u201d and \u201csettlement payments were based on the number of overdraft fees incurred.\u201d As in BancorpSouth: \u201cThe essence of [the bank customer\u2019s] Complaint [in PNC was] clearly [the bank\u2019s] maximization of overdraft fees. Since there\u2019s no other was to construe the \u2026 Complaint, [the insurer in PNC] had no duty to defend the overdraft fee claims because they are excluded from coverage.\u201d So too in BancorpSouth.<\/p>\n

\n

The plaintiffs\u2019 bar has targeted banks and others with class actions alleging they improperly charged fees to consumers. Many suits involved multiples of millions in alleged harm and resulted in multi-million dollar settlements. Defense costs also ran into multiples of millions. In 2010, new Federal rules provided consumers a chance to avoid overdraft fees on certain debit card transactions and ATM withdrawals. But, as a simple Google search will show, that didn\u2019t end the overdraft fee class actions. Earlier this year the Consumer Protection Financial Bureau adopted a rule barring banks, credit-card companies, and financial service firms from requiring consumers to agree to arbitration clauses and class-action waivers. But the Trump administration just struck that rule. So presumably we\u2019ll see fewer consumer class actions involving improper fee charges.<\/p>\n<\/blockquote>\n

Bottom line:<\/em> But if you\u2019re a broker or risk manager, why not make sure the policy you\u2019re buying at least has Defense Costs coverage for these types of cases.<\/p>\n","protected":false},"excerpt":{"rendered":"

by: Chris Graham and Shelly Hall Summary: Today\u2019s post focuses on a recent Seventh Circuit decision, BancorpSouth v. Federal Insurance Co., No. 17-1425 (7th Cir. Oct. 12, 2017), affirming dismissal, for failure to state a legally viable claim, of a bank\u2019s complaint against an insurer for alleged breach of a duty to defend and pay […]<\/p>\n","protected":false},"author":6,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[3,4,1],"tags":[],"_links":{"self":[{"href":"https:\/\/www.joneslemongraham.com\/blog\/wp-json\/wp\/v2\/posts\/2914"}],"collection":[{"href":"https:\/\/www.joneslemongraham.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.joneslemongraham.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.joneslemongraham.com\/blog\/wp-json\/wp\/v2\/users\/6"}],"replies":[{"embeddable":true,"href":"https:\/\/www.joneslemongraham.com\/blog\/wp-json\/wp\/v2\/comments?post=2914"}],"version-history":[{"count":19,"href":"https:\/\/www.joneslemongraham.com\/blog\/wp-json\/wp\/v2\/posts\/2914\/revisions"}],"predecessor-version":[{"id":2933,"href":"https:\/\/www.joneslemongraham.com\/blog\/wp-json\/wp\/v2\/posts\/2914\/revisions\/2933"}],"wp:attachment":[{"href":"https:\/\/www.joneslemongraham.com\/blog\/wp-json\/wp\/v2\/media?parent=2914"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.joneslemongraham.com\/blog\/wp-json\/wp\/v2\/categories?post=2914"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.joneslemongraham.com\/blog\/wp-json\/wp\/v2\/tags?post=2914"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}