Why it matters

A federal district court found an insurer responsible to provide coverage for a $55 million class action settlement ($30 million after satisfaction of a $25 million retention) of a suit between a bank and a class of customers who alleged that the bank charged excessive overdraft fees. The class claimed that U.S. Bank improperly sequenced debits so as to increase the amount of overdraft fees, raising the bank’s revenue. The bank reached a $55 million settlement with the class and sought coverage, including defense costs, from its insurers. Applying Delaware law, a Minnesota federal court rejected the insurers’ argument that coverage was barred by public policy because the indemnity payment was for restitution. The court found that the policies at issue “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.” No final adjudication occurred in the underlying litigation because the case settled and the settlement agreement did not characterize the fund as restitution.

Detailed Discussion

Beginning in 2009, multiple class action lawsuits were filed against U.S. Bank, challenging how the bank assessed fees when a customer overdrew his or her account. The plaintiffs alleged that U.S. Bank unlawfully posted transactions in order to maximize the assessed overdraft fees. The suits were consolidated in a multidistrict litigation in Florida federal court.

U.S. Bank maintained a primary insurance policy with Indian Harbor Insurance Company and an excess policy with ACE American. Both policies required the consent of the insurers prior to settling a claim. Indian Harbor consented to a $45 million settlement and ACE consented to a settlement of $60 million, both reserving their rights to later challenge coverage.

The underlying litigation settled for $55 million in 2013. U.S. Bank did not admit liability on the claims, and the nature of the payment (e.g., damages or restitution) was not specified.

U.S. Bank then sought coverage from its insurers for its settlement fund (net of a $25 million deductible) and defense costs.

The insurers denied coverage, relying on (1) an Uninsurable Provision, which excluded coverage for losses for “[m]atters which are uninsurable under the law pursuant to which this Policy is construed,” and (2) an Extension-of-Credit Provision, which excluded coverage for “principal, interest, or other monies either paid, accrued, or due as the result of any loan, lease or extension of credit by [U.S. Bank].”

Finding the policy language unambiguous, the court granted summary judgment for U.S. Bank.

As to the public policy argument, the court assumed without deciding that Delaware law forbids insurance coverage for restitution, and then found that the settlement payment was not restitution. The Uninsurable Provision, construed in connection with an Ill-Gotten Gains Provision, shows that there must be a final adjudication in the underlying action that the payment was of a prohibited nature.

As such, even if restitution payments were deemed to be uninsurable, there was no final adjudication that the payment was for restitution and, as such, the exclusionary language was not satisfied.

The court refused to assume that the settlement constituted restitution based simply on the allegations in the underlying complaint. “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,” the court explained. “Instead, a settlement represents the parties’ willingness to resolve the claims after weighing the negotiated settlement amount against the potential judgment amount and accounting for the costs and benefits of continued litigation. That is exactly what this settlement was.”

Although the insurers argued that this interpretation would lead to an absurd result and allow the insured to contract around public policy, the court said that it was simply tracking the language of the policies. The policy itself required a final adjudication, the judge noted, and the insurers could have refused to provide consent for the settlement if they were concerned that it constituted restitution.

Turning to the Extension-of-Credit Provision, the court clarified that the case was not about overdraft protection, but the assessment of overdraft fees, precluding application of the exclusion. “This is a distinction that makes a difference given that an overdraft fee is simply a fee for a service and overdraft protection is likely an extension of credit,” he wrote.

The court ordered the insurers to indemnify U.S. Bank for $30 million and reimburse the insured for related defense costs.

To read the order in U.S. Bank v. Indian Harbor Ins. Co., click here.