Fee Dispute Exclusion in Bank E&O Policy Not Triggered by Allegations Concerning Overdraft Charges

Applying Texas law, the United States Court of Appeals for the Fifth Circuit has held that a fee dispute exclusion in a bankers liability policy did not apply to bar coverage for claims against the insured bank that involved allegations with respect to overdraft charges.  First Community Bancshares v. St. Paul Mercury Ins. Co., No. 13-50657 (5th Cir. Nov. 14, 2014). 

The insured bank was sued by its customers, who alleged that the bank failed to disclose material information regarding its overdraft protection services and provided incorrect, deceptive, and misleading account statements and electronic balances, which prevented the customers from ascertaining their accurate account balances.  The customers sought disgorgement of fees, actual damages, restitution, and an order enjoining the bank “from continuing its overdraft policies and practices on the grounds that they are wrongful, unfair and unconscionable.”

The insurer denied coverage, relying on the policy’s fee dispute exclusion, which barred coverage for claims “based upon, arising out of or attributable to any dispute involving fees or charges for an Insured’s services.”  In the coverage litigation that followed, the court found that the exclusion did not apply because the charging of the fees was not the conduct complained of by the customers or the harm for which they sought redress.  Rather, according to the court, the “primary harm” at issue stemmed from alleged practices by the bank that prevented the customers from ascertaining their account balances and from accurately planning spending, withdrawals and deposits.  The court noted that while overdraft charges sometimes resulted, and therefore were an “additional harm” suffered by the customers, the relationship between the alleged misconduct and the overdraft fees was not sufficient to trigger the exclusion and preclude the duty defend.

The court, however, also found that because the applicability of the exclusion presented a “bona fide coverage dispute,” the insured’s claim for bad faith denial of a request for a defense could not be sustained.