A Georgia federal district court ruled on August 7th that a bank was not entitled to insurance coverage for class action claims based on its allegedly excessive overdraft fees.  Fidelity Bank v. Chartis Specialty Insurance Company, 1:12-CV-4259-RWS (US Dist. Ct. ND Ga, August 7, 2013). Customers filed a class action lawsuit against Fidelity Bank, claiming that Fidelity charged overdraft fees that amounted to usurious interest charges in violation of Georgia law.  The plaintiffs asserted that Fidelity wrongly charged them a flat $29 fee when it covered overdrafts, regardless of the amount of the overdraft.

Fidelity was insured under a “Management and Professional Liability for Financial Institutions” policy issued by Chartis Specialty Insurance Company (Chartis).  The Insuring Agreement stated: “This policy shall pay the Loss of [the] Insured arising from a Claim …. for any Wrongful Act of the Insured in the rendering of or failure to render Professional Services.” “Wrongful Act” was defined as “any actual or alleged breach of duty, neglect, error, misstatements, omission or act.”  The definition of “Professional Services” included services “rendered for or on behalf of a customer or client …. in return for a fee, commission or other compensation.”  The policy excluded claims arising out of disputes over fees charged by the bank.

Fidelity tendered the claim to Chartis, which agreed to pay defense costs but denied any duty to indemnify.  Fidelity sued Chartis in federal court in Georgia, seeking recovery of its settlement with the underlying plaintiffs.  Both parties moved for summary judgment.  In its motion, Chartis argued that the claim was not covered for four reasons: (1) charging overdraft fees was a deliberate business decision, not a “Wrongful Act,” (2) the alleged acts were not for “Professional Services,” (3) the underlying settlement constitutes uninsurable restitution, and (4) the policy excludes fee disputes.

The court rejected Chartis’s first two arguments. Focusing on what it called the “very broad” definition of a “Wrongful Act,” the court held that improperly charging interest to customers constituted an act causing a “Loss” under the policy.  The court also described the definition of “Professional Services” as “quite broad,” and held the Fidelity’s “practice of covering its customers’ overdrafts [was] a service ‘rendered for or on behalf of a customer or client of [the bank] in return for a fee, commission or other compensation.’”

Nevertheless, the court found Chartis’s third and fourth arguments to be “compelling.”  The court observed that Fidelity “was deducting for its own use funds from its customers’ accounts in a manner that was not legally authorized.  As a result of the lawsuit, [Fidelity] was required to return its customers’ funds in the same manner that it would if [it] had mistakenly deducted funds …. because of, for example, a computer error.”  On those facts, the court held that requiring [Chartis] to pay restitution for amounts [Fidelity] collected pursuant to illegal practices would result in a windfall to [Fidelity].”  If the claim were covered, Fidelity would be “free to collect fees and make profits from its customers through illegal conduct, and the insurer is on the hook when customers sue while [Fidelity] keeps the ill-gotten gains.”  The court also held that the exclusion for disputes over fees applied.

The court’s ruling on the “Wrongful Act” issue can be contrasted with a recent decision by a California federal district court concerning insurance coverage for a class action breach of contract claim.  The California federal court in that case held that “if a contracting party fails to pay amounts due under a lawful contract and is sued for that failure to pay, it cannot then obtain a windfall by having its payments covered by an insurance policy covering only ‘wrongful acts.’”  The insured’s wrongful failure to pay the money it owed the class plaintiffs under a contract was not a “Wrongful Act” within the meaning of the policy.   Interestingly, neither the Georgia federal court nor the California federal court expressly held that when an insured merely is required to return funds that it had no legal right to receive or retain, the insured has not suffered a “Loss” within the meaning of a liability insurance policy.