In a blow to a bank that settled overdraft litigation for $24 million, the U.S. Court of Appeals, Seventh Circuit affirmed that the financial institution’s liability policy did not provide coverage for the deal.

What happened

A financial institution that provides checking and savings accounts to consumers purchased a bankers’ professional liability insurance policy from Federal Insurance Co. in November 2009. The policy obligated the insurer to pay for claims made against the bank during the policy period but contained a number of exclusions, including Exclusion 3(n), which stated that Federal “shall not be liable for Loss on account of any Claim … based upon, arising from, or in consequence of any fees or charges.”

Bank customer Shane Swift filed a putative class action suit in May 2010 in Florida federal court, alleging that the bank maximized the amount of overdraft fees it could charge customers through a variety of means, policies and procedures, describing the practices as an “unfair and unconscionable assessment and collection of excessive overdraft fees.”

In February 2016, the bank and Swift reached a deal. The bank agreed to pay $24 million into a settlement fund for class member payments after deductions of $8.4 million for attorney’s fees and $500,000 for administrative costs, and the court thereafter approved the settlement.

The bank tendered the Swift complaint to Federal, seeking coverage for both defending the lawsuit and indemnifying the cost of the settlement. The insurer denied all coverage and the bank sued for breach of contract.

Federal filed a motion to dismiss the suit, relying upon Exclusion 3(n) to argue that Swift’s claims regarding the overdraft fees were excluded from coverage because they were “based upon, arising from, or were in consequence of fees and charges.” A district court granted the motion and the Seventh Circuit affirmed on appeal.

The bank took the position that Swift’s lawsuit was actually a challenge to its general policies and practices, with overdraft fees used as an example. But the Seventh Circuit was not persuaded. References in the complaint to “deceptive and/or unfair practices” could not “be read in a vacuum, and instead, must be read in the context of the entire complaint,” the court said. “Accepting [the bank’s] argument that the primary harm alleged is [the bank’s] general policies and procedures would require us to uncouple allegations, read them in isolation, and disregard their context,” the court noted.

“Read in its entirety, the only harm alleged by the Swift Complaint is [the bank’s] maximization of excessive overdraft fees on its customers,” the panel wrote. “The very first paragraph of the Swift Complaint specifically states that the crux of the lawsuit centers on [the bank’s] ‘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. To be sure, language focusing on ‘overdraft policies and procedures’ appears in a number of places, but it is always connected with the wrongful collection or imposition of overdraft fees.”

Finding no other way to construe the complaint than as an objection to the maximization of overdraft fees, the Seventh Circuit held that Exclusion 3(n)—which (among other things) excludes from coverage any claim “based upon, arising from, or in consequence of any fees or charges”—applied to preclude coverage for the Swift lawsuit. As the duty to defend is broader than the duty to indemnify, this conclusion also meant Federal had no duty to indemnify the bank for the settlement and the court affirmed dismissal of the bank’s suit.

An important note: This case was decided under Mississippi law. Under that law, the determination of whether an insurance company has a duty to defend depends upon the comparison of the language contained in the policy with the allegations contained in the complaint in the underlying action. To the extent the law in a particular jurisdiction differs, the analysis may not apply.

To read the opinion click here.

Why it matters

Pay attention to your insurance coverage: You may or may not be covered for specific practices or omissions. The decision—which provides a cautionary tale for banks about the scope of coverage available under an insurance policy—may face further review, as the bank has already filed a petition for rehearing en banc before the Seventh Circuit.