The United States Court of Appeals for the Third Circuit has held that a bank’s $102 million payments to settle lawsuits alleging improper collection of overdraft protection fees are not covered “Damages” under the bank’s professional liability insurance policies. The PNC Financial Services Group, Inc. v. Houston Cas. Co., WL 2016 1730734 (3d Cir. May 2, 2016). Applying Pennsylvania law, the court also reversed the District Court’s finding that plaintiffs’ attorneys’ fees awarded out of the settlement funds were covered. Wiley Rein represents the 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 approximately $102 million, of which $30 million was later awarded to plaintiffs’ attorneys for legal 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 Third Circuit agreed with the District Court that the bank’s settlement payments “in fact refunded overdraft fees” and therefore that the “professional services charge exception” from covered “Damages” quoted above unambiguously precluded coverage. The court rejected the bank’s argument that the policy language is ambiguous and could reasonably be read to apply only to “first-party” losses or where there has been a “final adjudication.”  The court concluded that the professional services charge exception did not render the policy illusory and did not conflict with the policy’s “personal profit exclusion,” which is “much broader” and does not “speak to the same subject” as the professional services charge exception. The court therefore rejected the bank’s argument that the final adjudication requirement of the personal profit exclusion should apply to the professional services charge exception.

The court reversed the District Court’s finding that approximately $30 million awarded to the underlying plaintiffs’ counsel as attorneys’ fees and costs did not fall within the professional services charge exception. The court noted that the policy covers only “Loss” that the bank was “legally obligated to pay.” Therefore, “[a]lthough the settlement agreements contemplated that some attorneys’ fees would likely be paid to class counsel, [the bank] was not legally obligated to pay those fees under the terms of the settlement agreements.” Instead, the fees and costs were paid “by the class out of the settlement funds.” According to the court, “[t]hat some money from each common fund was subsequently paid to counsel upon order of the respective courts does not change the purpose of the funds—to resolve the class members’ claims for wrongly collected overdraft fees.” The court therefore concluded that the entire $102 million in settlement payments made by the bank constituted a refund of fees or charges for Professional Services that class members paid and, as such, was not covered pursuant to the professional services charge exception from covered “Damages.”