Seventh Circuit Upholds Ruling That Excludes Insurance Coverage for Overdraft Fees

Courts Appellate Seventh Circuit Overdraft Class Action Settlement Litigation

On October 12, the U.S. Court of Appeals for the Seventh Circuit affirmed an Indiana District Court’s 2016 ruling, agreeing that an insurance company does not bear the responsibility for covering a bank’s $24 million class action settlement under a policy provision that excludes coverage for any case involving fees. In upholding the lower court’s decision, the three judge panel concluded that the insurance company had no duty to defend or indemnify the bank on the basis that the underlying overdraft fee claims fall under “Exclusion 3(n)” in the bank's professional liability insurance policy, which states that the insurance company “shall not be liable for [l]oss on account of any [c]laim . . . based upon, arising from, or in consequence of any fees or charges.” Class claims alleging that the bank manipulated its debit processing to “maximize overdraft revenue” by charging purportedly excessive fees to consumers who overdraw their checking and savings accounts triggered the exclusion. The panel also noted that an insurance company’s decision to include fee exclusions in banking liability policies is designed to prevent the “moral hazard” of allowing banks to “freely create other customer fee schemes” knowing they could easily secure coverage.