Pennsylvania Federal Court Confirms that Settlements Returning Overdraft Fees Are Not “Damages”

The United States District Court for the Western District of Pennsylvania, applying Pennsylvania law, has rejected a motion to reconsider its June 24, 2014 decision that amounts a bank paid to customers in settlement of lawsuits seeking the return of allegedly improper overdraft protection fees constitute covered “Damages” under the 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 represents 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.

In its June 24, 2014 order, the District Court concluded that the portions of the overdraft litigation settlements paid to class members fall within the fee exception and were not covered.  The bank sought reconsideration of the order, arguing that the fee exception was intended only to carve out fees that were paid to a plaintiff class member who happened to be an insured director, officer or employee of the bank.  The court concluded that the policy language was not reasonably susceptible to this interpretation, noting that the policy defined “Insured” to include individuals acting in their insured capacity, but that the bank’s new interpretation of the fee exception would involve individuals acting instead as customers of the bank.

The court further rejected the bank’s argument that its order rendered the policies illusory.  The court reasoned that the policies are illusory only if they would not pay benefits under any reasonably expected set of circumstances.  Because the bank could face claims that did not seek the recovery of fees, the court concluded that that the policies were not illusory.  The court also determined that its interpretation of the policies was appropriate as a question of law, dismissing the bank’s contention that the court improperly decided a jury question by determining that bank’s overdraft settlements implicated the fee exception.

Finally, the court refused to credit the bank’s contention that, because the District Court judge reached a different interpretation of the policies’ fee exception than the magistrate judge, the policy language was ambiguous.  The court emphasized that its interpretation of the fee exception is “the only reasonable interpretation,” and the provision therefore is not ambiguous.


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