Why it matters

In a victory worth tens of millions of dollars, a Minnesota federal court ruled that U.S. Bank is entitled to coverage for three class actions challenging overdraft fee practices. Plaintiffs in the underlying litigation claimed that the bank reordered transactions from highest to lowest instead of chronologically, leading to quicker overdrafts and more fees. U.S. Bank settled the suits for $55 million and then sought coverage from its insurers. The insurers balked, arguing that the settlement constituted uninsurable restitution. The federal court disagreed, concluding that restitution was not barred as a matter of law and so the policy exclusion that precluded coverage for restitution arising from a final adjudication did not apply to a settlement. It is significant that the court held Delaware did not preclude coverage of restitution or “ill-gotten gains claims” as a matter of state law.

Detailed Discussion

Three class actions were filed against U.S. Bank in 2009 with identical allegations. The plaintiffs claimed that instead of applying transactions in chronological order, the bank posted transactions from the highest amount to the lowest amount, creating the most overdrafts and maximizing the overdraft fees assessed on customers.

Four years later the bank settled the suits for a total of $55 million. U.S. Bank then sought coverage for the settlement and defense costs from two insurers: Indian Harbor Insurance Company and ACE American Insurance Company. Both insurers denied coverage.

First, the insurers took the position that the settlement was not a covered loss under the insurance policies because coverage was barred in “[m]atters which are uninsurable under the law pursuant to which this Policy is construed,” such as, they claimed, restitution. As a fallback position, the insurers contended that an exclusion for Extension of Credit by the bank applied and precluded coverage.

U.S. Bank sued for breach of contract and sought a declaratory judgment that defense and indemnification were owed by Indian Harbor and ACE. The insurers moved for judgment on the pleadings, but the court sided with the policyholder.

Significantly, applying Delaware law, the court noted that no authority in the state has held that restitution is uninsurable as a matter of law. Thus, while both parties speculated as to how courts in the state might rule, the court limited its analysis to the disputed exclusion finding that it only precluded coverage for restitution resulting from a final adjudication, thereby including by implication restitution stemming from a settlement.

The court reasoned that the policies “exclude from coverage money to which U.S. Bank ‘is not legally entitled’ only ‘as determined by a final adjudication in the underlying action.’ The provision shows not merely that the parties contemplated the possibility of coverage for restitution, but that they agreed coverage would exist unless the restitution was imposed by a final adjudication.” “When an underlying action alleging ill-gotten gains settles before trial, there is no final adjudication in that action. So here, where the class actions alleging ill-gotten gains were settled before trial, there is no final adjudication and the settlement is not excluded from coverage.”

“The insurers’ reliance on the uninsurable provision to assert that the settlement is not a covered loss under the policies is misplaced,” the court held. “Delaware law does not prohibit insurance for restitution and the parties agreed that restitution is insurable when, as here, the underlying allegations of ill-gotten gains were not finally adjudicated.”

The judge was likewise unmoved by the insurers’ efforts to apply an exclusion for losses paid as a result of an “extension of credit.” As for the Extension of Credit provision, the court found the insurers’ interpretation “overbroad and untenable” because “taken to its extent, the provision would bar coverage of any professional liability claim relating to U.S. Bank’s lending operations. The parties could not have intended to exclude from coverage such a large swath of potential claims.”

To read the opinion in U.S. Bank v. Indian Harbor Insurance Co., click here.