7th Circuit: Insurance company had no duty to defend, indemnify bank

A Mississippi-based bank that was sued for charging excessive overdraft fees was not entitled to coverage under its insurance policy because the policy specifically excluded claims arising from fees or charges, the 7th Circuit Court of Appeals has ruled.

In BancorpSouth, Incorporated v. Federal Insurance Company, 17-1425, Federal Insurance Co.  sold BancorpSouth Inc., a Mississippi-based financial institution, a bankers’ professional liability insurance policy that provided that Federal would pay for loss on account of any claim made against Bancorp for a “wrongful act.” However, the policy also included an exclusion providing that Federal “shall not be liable for Loss on account of any Claim…based upon, arising from, or in consequence of any fees or charges.”

Less than a year after Bancorp purchased the policy, Shane Swift filed a class action against the financial institution in the U.S. District Court for the Northern District of Florida, alleging Bancorp had “maximized the amount of overdraft fees it could charge customers” by reordering debits from highest to lowest, among other tactics. The complaint asserted claims for breach of contract, unconscionability, conversion, unjust enrichment and a violation of the Arkansas Deceptive Trade Practice Act on behalf of “(a)ll BancorpSouth customers in the United States who…incurred an overdraft fees as a result of BancorpSouth’s practice of resequencing debit card transactions from highest to lowest.”

Bancorp and Swift ultimately reached a settlement in which Bancorp agreed to pay $24 million to the class plaintiffs, $8.4 million of which was designated for attorney fees, plus $500,000 in class administrative costs. Bancorp sought coverage from Federal for defending the lawsuit and indemnifying the settlement, but Federal denied all coverage.

Bancorp then filed suit against Federal, raising breach of contract and bad-faith denial of coverage claims. Federal responded by moving to dismiss for failure to state a claim, arguing Swift’s claims regarding the overdraft fees were excluded from the policy’s coverage. Senior Judge Sarah Evans Barker in the U.S. District Court for the Southern District of Indiana agreed and granted the motion to dismiss, prompting the instant appeal.

On appeal, Bancorp argued its general policies and procedures, and not the overdraft fees, were the primary sources of harm alleged in the class action, so the exclusion related to “any fees or charges” would not apply. But in a Thursday opinion, the 7th Circuit Court of Appeals disagreed, with Judge William J. Bauer noting that under Mississippi law, which governs here, a duty to defend is determined based on a comparison of language in the policy and language in the underlying complaint.

Here, although the complaint does address Bancorp’s “practices,” it consistently uses language that ties Bancorp’s practices directly to its maximization of overdraft fees, Bauer wrote. Thus, the exclusion applied, and Federal did not have a duty to defend against the claims.

Further, the duty to defend is broader than the duty to indemnify under Mississippi law, Bauer wrote, so because Federal did not have a duty to defend, it also did not have duty to indemnify. Without that duty, Bancorp’s third claim alleging bad-faith denial of coverage also fails.