The United States District Court for the Western District of Pennsylvania, applying Pennsylvania law, has concluded that amounts paid to customers in settlement of lawsuits seeking the return of allegedly improper overdraft protection fees do not constitute covered “Damages” under a bank’s professional liability insurance policies.  PNC Financial Services Group, Inc. v. Houston Cas. Co., No. 13-cv-331 (W.D. Pa. June 24, 2014).  Wiley Rein represented the excess insurer in the litigation.

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, thus 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.”  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 thus were “fees,” falling within the exception 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.

A Magistrate Judge issued a report and recommendation on the parties’ cross-motions for judgment on the pleadings, concluding that the policies afforded coverage for the settlements.  Following objection by the insurers, however, the District Court adopted the Magistrate Judge’s report only in part.  The District Court agreed with the insurers that the portions of the overdraft litigation settlements paid to class members fall within the fee exception because they constitute a refund of fees for professional services and concluded that there was “no other way for the Court to construe the Fee Exception other than to encompass the settlements at issue.”  The court also rejected the bank’s reliance on the policies’ so-called “personal profit exclusion,” finding that no final adjudication was required under the policy language to apply the fee exception to the definition of “Damages.”  Accordingly, the court concluded that settlement amounts refunded to customers therefore were not covered.

The court determined, however, that other amounts paid in the settlements—plaintiffs’ attorneys fees and expenses and incentive payments—did not fall within the fee exception and did constitute covered “Damages.”  Because these amounts exceeded the retention of the primary policy, the court concluded that coverage under the primary policy had been implicated to at least some extent.