A magistrate judge of the United States District Court for the Western District of Pennsylvania has issued a report and recommendation to the District Court concluding that a bank’s settlements of lawsuits seeking the return of allegedly improper overdraft protection fees constituted covered “Damages” under the bank’s professional liability insurance policies.  The PNC Financial Services Group, Inc. v. Houston Cas. Co., No. 13-cv-331 (W.D. Pa. May 21, 2014)

The bank’s customers filed class action litigation alleging that the bank improperly manipulated the order in which it processed customers’ transactions in order to cause their accounts to be overdrawn multiple times, maximizing the number of fees it could charge for “overdraft protection services.”  The bank settled the customer lawsuits, agreeing to pay over $90 million to customers who had been charged multiple overdraft fees.  The bank sought coverage for the settlements under its professional liability policies.  The policies afforded specified coverage for “Damages,”  defined to include “a judgment, award, surcharge or settlement as a result of a Claim” but not to include “fees, commissions or charges for Professional Services paid or payable to an Insured” or “monies either paid, accrued or due an Insured as the result of any loan, lease or extension of credit.”  The bank filed a declaratory judgment action seeking coverage for the settlements under the policies.

The insurers argued that the settlements did not constitute covered “Damages” because they represented the return of overdraft protection fees collected by the bank and were “fees” and monies paid as the result of a loan, falling within the carve-back to the “Damages” definition.  The insurers also argued that Pennsylvania public policy precluded insurance coverage for the return of amounts an insured was alleged to have wrongfully collected from customers because such coverage would result in a windfall to the insured.

The Magistrate Judge concluded that the policies afforded coverage for the settlements.  The court reasoned that the term “Damages” should be interpreted in favor of the insured and that carve-outs from that definition for fees or monies paid as the result of loans “were intended to exclude from coverage first party losses sustained by [the bank].”  According to the court, “permitting the exceptions to the definition of ‘[d]amages’ to apply to third-party claims for improperly assessed fees or loan interest charges would render coverage under the financial institution policy illusory.”  The court found additional support for its conclusion by reference to the policies’ exclusion for claims brought about or contributed to in fact by “profit or remuneration gained by any Insured to which such insured is not legally entitled[,] as determined by a final adjudication in the underlying action.”  The court stated that the exclusion for improper profits would be “superfluous” if the exceptions to the definition of “Damages” applied to third-party claims.  Finally, the court concluded that Pennsylvania public policy did not bar coverage for the settlements because the bank’s “conduct has not been judicially determined to have been in bad faith or to violate consumer protection or criminal laws.”  For these reasons, the magistrate judge recommended granting the bank’s motion for judgment on the pleadings seeking a determination that its settlements were covered and denying the insurers’ cross-motion seeking a determination of no coverage.

The court’s recommendation is subject to review by the District Court.