U.S. Bank National Association et al v. Indian Harbor Insurance Company et al

Filing 105

Memorandum and Order: 1. Denying Indian Harbor's Motion for Judgment on the Pleadings 46 ; and 2. Denying ACE American's Motion for Judgment on the Pleadings 48 . (Written Opinion). Signed by The Hon. Paul A. Magnuson on 07/03/2014. (LLM)

UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA
U.S. Bank National Association and
U.S. Bancorp,

Case No.: 12-cv-3175 (PAM/JSM)

Plaintiffs,
v.

MEMORANDUM AND ORDER

Indian Harbor Insurance Company and
ACE American Insurance Company,
Defendants.

This matter is before the Court on Indian Harbor’s and ACE American’s Motions for
Judgment on the Pleadings. For the reasons that follow, the Court denies the Motions.
BACKGROUND
Beginning in 2009, three class actions were brought against U.S. Bank for
overcharging overdraft fees to its customers.1

(Compl. (Docket No. 1) ¶¶ 43-44.)

Specifically, the class actions alleged that U.S. Bank re-ordered customers’ debit-card
transactions from highest amount to lowest amount (instead of chronologically), posted the
transactions to customers’ checking accounts in that order, and allowed the accounts to be
overdrawn—thereby creating the most overdrafts and maximizing the overdraft fees assessed
on its customers. (Id. ¶ 46.) The class actions also alleged that U.S. Bank misrepresented

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The three class actions were Speers v. U.S. Bank, N.A., No. 3:09-cv-00409-HU (D.
Or. filed April 17, 2009); Waters v. U.S. Bank, N.A., No. 3:09-cv-02071-JSW (N.D. Cal.
filed May 12, 2009); and Brown v. U.S. Bank, N.A., No. 2:10-cv-00356-RMP (E.D. Wash.
filed Oct. 13, 2010).

its overdraft policy of high-to-low posting to its customers. (Id.) The class actions asserted
a variety of common-law and statutory claims and sought the return of the excess overdraft
fees collected by U.S. Bank. (Id.) Eventually, the class actions were transferred to a multidistrict litigation in the Southern District of Florida.2 (Id. ¶ 45.) And in 2013, U.S. Bank
settled the class actions for $55 million. (Id. ¶¶ 51-54.)
U.S. Bank then made an insurance claim to Indian Harbor and ACE American (the
“Insurers”) for coverage of the amount paid to defend against and settle the class actions.
(Id. ¶ 58.) U.S. Bank had purchased a professional-liability insurance policy from Indian
Harbor for primary coverage with a $20 million liability limit, subject to a $25 million
deductible. (Id. ¶¶ 17-18, Exs. A-B.) U.S. Bank also had purchased a similar policy from
ACE American for excess coverage with a $15 million liability limit. (Id. ¶¶ 39-40, Exs. CD.) Within those policy terms, U.S. Bank demanded coverage for more than the $25 million
deductible but less than the total $35 million liability limit, or $30 million plus defense costs.
(Id. ¶¶ 62, 66.)
The Insurers denied U.S. Bank’s claim, primarily on the ground that the settlement
was not a covered loss under the insurance policies. (Id. ¶¶ 59, 63.) The policies granted
coverage only for a “Loss”, and they defined “Loss” as “the total amount which [U.S. Bank]
becomes legally obligated to pay on account of each Claim . . . made against [U.S. Bank] for
Wrongful Acts . . . including, but not limited to, damages, judgments, settlements, costs,

2

See In re Checking Account Overdraft Litig., No. 1:09-md-02036-JLK (S.D. Fla.).
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pre-judgment and post-judgment interest and Defense Costs.” (Id. ¶¶ 19-21.) The policies
limited the “Loss” definition to omit, as relevant here, either “[m]atters which are uninsurable
under the law pursuant to which this Policy is construed” (the “Uninsurable Provision”) or
“principal, interest, or other monies either paid, accrued, or due as the result of any loan,
lease or extension of credit by [U.S. Bank]” (the “Extension-of-Credit Provision”).
(Id. ¶ 22.) And the policies excluded from coverage claims “brought about or contributed
in fact by any . . . profit or remuneration gained by [U.S. Bank] or to which [U.S. Bank] is
not legally entitled . . . as determined by a final adjudication in the underlying action” (the
“Ill-Gotten Gains Provision”). (Id. ¶ 27.) The Insurers maintained that the Uninsurable
Provision encompassed the settlement as legally uninsurable restitution. (Id. ¶¶ 59, 63.)
U.S. Bank disagreed and, in December 2012, sued the Insurers for breach of contract
and a declaratory judgment. (Id. ¶¶ 67-83.) U.S. Bank claimed that the settlement falls
within the policies’ definition of “Loss” and is thus covered, that the Insurers must pay the
covered amount, that their refusal to do so is a breach of the policies, and that they are
responsible for the resulting damages. (Id.) The Insurers now move for judgment on the
pleadings.
DISCUSSION
Judgment on the pleadings should be granted if the moving party clearly establishes
that there are no material issues of fact and that it is entitled to judgment as a matter of law.
Poehl v. Countrywide Home Loans, Inc., 528 F.3d 1093, 1096 (8th Cir. 2008). When
evaluating a motion for judgment on the pleadings, the Court must accept as true all facts
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pleaded by the non-moving party and grant all reasonable inferences from the pleadings in
that party’s favor. Faibisch v. Univ. of Minn., 304 F.3d 797, 803 (8th Cir. 2002). While the
Court generally must ignore materials outside the pleadings, it may consider “some public
records, materials that do not contradict the complaint, or materials that are necessarily
embraced by the pleadings.” Saterdalen v. Spencer, 725 F.3d 838, 840-41 (8th Cir. 2013).
The material facts, as pertinent to these motions, are undisputed. The issue that
remains is whether, as a matter of law, the settlement is a covered loss under the insurance
policies. Whether the policies cover the settlement turns on the terms of the policies
themselves.
When interpreting an insurance policy, the Court—a federal court sitting in
diversity—applies state substantive law. E-Shops Corp. v. U.S. Bank Nat’l Ass’n, 678 F.3d
659, 663 (8th Cir. 2012). The policies are governed by Delaware law. (Compl. ¶ 23.) Under
Delaware law, interpretation of an insurance policy is a question of law. Rhone-Poulenc
Basic Chemicals Co. v. Am. Motorist Ins. Co., 616 A.2d 1192, 1195 (Del. 1992). Delaware
courts interpret an insurance policy, like all contracts, “in a common sense manner, giving
effect to all provisions so that a reasonable policyholder can understand the scope and
limitation of coverage.” Penn Mut. Life Ins. Co. v. Oglesby, 695 A.2d 1146, 1149 (Del.
1997). If the policy language is clear and unambiguous, its plain meaning must be enforced.
ConAgra Foods, Inc. v. Lexington Ins. Co., 21 A.3d 62, 69 (Del. 2011). But if the policy
language is ambiguous—in that it is susceptible to two or more reasonable
interpretations—the principle of contra proferentem dictates that the policy is to be construed
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against the insurer who drafted it. Id.
In asserting that the policies do not cover the settlement, the Insurers rely on two
provisions: the Uninsurable Provision and the Extension-of-Credit Provision.
I.

Uninsurable Provision
The Insurers principally argue that the policies do not cover the settlement under the

Uninsurable Provision. According to the Insurers, the settlement is restitutionary, and
restitution is uninsurable as a matter of law. The Insurers highlight several court decisions
that have rejected insurance coverage for restitution on the basis that returning money or
property to which one is not legally entitled can never constitute a loss. Two aspects of the
policies’ clear language, however, contradict the Insurers’ argument.
First, the settlement is not uninsurable under Delaware law because no Delaware
authority has held that restitution is uninsurable as a matter of law. The Uninsurable
Provision only carves out from the definition of “Loss” those “[m]atters which are
uninsurable under the law pursuant to which this Policy is construed,” or Delaware law. The
Insurers have failed to cite, and the Court cannot locate, any Delaware authority deeming
restitution uninsurable.

Delaware courts have scrutinized public-policy bars against

insurance coverage in similar contexts, only to conclude that public policy did not prohibit
coverage. See, e.g., Whalen v. On-Deck, Inc., 514 A.2d 1072, 1073-74 (Del. 1986)
(concluding that public policy did not bar insurance coverage for punitive damages); Wilson
v. Chem-Solv, Inc., No. 85C-MY-1, 1988 WL 109375, at *1 (Del. Super. Ct. Oct. 14, 1988)
(concluding that public policy did not bar insurance coverage for civil penalties assessed for
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pollution). Yet neither Delaware statute nor case law expressly precludes insurance coverage
for settlements constituting restitution.
Both parties speculate as to how a Delaware court, if confronted with the issue
directly, would rule on the insurability of restitution. U.S. Bank suggests that Delaware
courts do not readily void insurance coverage based on public-policy considerations due to
their “pro-contractarian,” “pro-banking,” and “pro-policyholder” tilt. And the Insurers insist
that Delaware courts would simply follow the law of other States that forbid coverage. The
Court finds none of these reasons compelling enough to support holding, as a matter of first
impression, that Delaware law prevents parties from contracting to insure settlements
constituting restitution.
Second, the policies exclude from coverage restitution resulting from a final
adjudication and by implication include within coverage restitution stemming from a
settlement. The Ill-Gotten Gains Provision excludes from coverage money to which U.S.
Bank “is not legally entitled” only “as determined by a final adjudication in the underlying
action.” This provision shows not merely that the parties contemplated the possibility of
coverage for restitution, but that they agreed coverage would exist unless the restitution was
imposed by a final adjudication. When an underlying action alleging ill-gotten gains settles
before trial, there is no final adjudication in that action. See Clarendon Am. Ins. Co., No.
04C-11-167, 2008 WL 2583007, at *7 (Del. Super. Ct. June 25, 2008). So here, where the
class actions alleging ill-gotten gains were settled before trial, there is no final adjudication
and the settlement is not excluded from coverage.
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The Insurers vehemently dispute this interpretation of the Ill-Gotten Gains Provision.
The Insurers agree that the provision would not exclude coverage because there has been no
final adjudication. But the Insurers contend that all that means is that the exclusion is
irrelevant, not that it implicitly establishes coverage. Put differently, the Insurers assert that
U.S. Bank is equating a coverage exclusion with a coverage grant, and that the former cannot
create the latter.
To be sure, coverage logically must be granted according to the definition of “Loss”
before an exclusion can negate that coverage. Yet the definition of “Loss” must be
interpreted consistently with all provisions of the policy—even the exclusions. See O’Brien
v. Progressive N. Ins. Co., 785 A.2d 281, 287 (Del. 2001) (stating that the provisions of
insurance policies must be read “as a whole” and may not be rendered “meaningless”);
Westfield Ins. Co. v. Robinson Outdoors, Inc., 700 F.3d 1172, 1175 (8th Cir. 2012)
(explaining that exclusions equally affect the scope of coverage). The Insurers’ proposed
interpretation fails to do just that. Because the parties expressly excluded any restitution
resulting from a final adjudication through the Ill-Gotten Gains Provision, they must have
intended to include any restitution not resulting from a final adjudication (say, a settlement)
within the definition of “Loss”. And to interpret the Uninsurable Provision to always
preclude coverage for restitution would nullify the Ill-Gotten Gains Provision, which plainly
says that only a final adjudication precludes coverage for restitution. The provision must
have effect.

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The Insurers further contend that a line of cases starting with the Seventh Circuit’s
decision in Level 3 Communications, Inc. v. Federal Insurance Co., 272 F.3d 908 (7th Cir.
2001), support the proposition that, despite clear policy language to the contrary, restitution
is uninsurable. In Level 3, the insured claimed coverage for the settlement of a securitiesfraud action. Id. at 909. The insurance company responded that the settlement was
restitutionary and not a covered loss. Id. at 909-10. The Seventh Circuit agreed, concluding
that a “loss” within the meaning of an insurance contract cannot include the restoration of
an ill-gotten gain. Id. at 910. In reaching that conclusion, the Seventh Circuit reasoned that
insurance is “designed to cover only losses that injure the insured,” and “[a]n insured incurs
no loss within the meaning of the insurance contract by being compelled to return property
that it had stolen.” Id. at 910-11. The Seventh Circuit also rejected the notion that a
judgment was required to determine that the settlement was not a covered loss, stating that
regardless of whether the payment resulted from a settlement or a judgment, the insured had
to disgorge profits that allegedly were improperly obtained. Id. at 911-12.
The Court acknowledges the rule of Level 3 and its progeny that restitution is
generally uninsurable. An insured incurs no loss when it unlawfully takes money or property
and is forced to return it. Asking the insurance company to pick up the tab would only
bestow an unjustified windfall on the insured. But virtually all cases the Insurers cite that
follow Level 3 are distinguishable because they involved policies without a specific
provision requiring a “final adjudication.” The parties here agreed that the Level 3 rule
would only control if a final adjudication—not a settlement—resolved that U.S. Bank was
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not legally entitled to the overdraft fees and must return them. The parties knew about the
Level 3 decision when they executed the policies and still decided to cover a settlement
constituting restitution absent a final adjudication. Without governing Delaware law or
controlling policy language requiring otherwise, the parties’ agreement must be enforced.
See ConAgra Foods, 21 A.3d at 69 (stating that the plain meaning of clear policy language
must be enforced).
In sum, the Insurers’ reliance on the Uninsurable Provision to assert that the
settlement is not a covered loss under the policies is misplaced. Delaware law does not
prohibit insurance for restitution and the parties agreed that restitution is insurable when, as
here, the underlying allegations of ill-gotten gains were not finally adjudicated.
II.

Extension-of-Credit Provision
The Insurers also argue that the policies do not cover the settlement under the

Extension-of-Credit Provision. The Insurers contend that the settlement stems from U.S.
Bank’s overdraft policy of high-to-low posting, and that overdraft protection constitutes an
extension of credit to its customers. So, say the Insurers, the settlement was paid as a result
of an extension of credit, which is not a covered loss under the policies.
The Insurers are right that the Extension-of-Credit Provision omits from the policies’
definition of “Loss” money paid “as a result of any loan, lease or extension of credit” by U.S.
Bank. The Insurers also are right that at least one court has held that a bank’s practice of
covering customer overdrafts constitutes a loan to its customers for insurance purposes. See
Affilliated Bank/Morton Grove v. Hartford Accident & Indem. Co., No. 91-4446, 1992 WL
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91761, at *4 (N.D. Ill. Apr. 22, 1992). But in interpreting and applying the Extension-ofCredit Provision to preclude coverage of the settlement, the Insurers are wrong in two ways.
First, the Insurers’ interpretation of the Extension-of-Credit Provision is overbroad
and untenable. See Penn Mut. Life Ins., 695 A.2d at 1149 (stating that insurance policies
must be interpreted “in a common sense manner”). It is overbroad because the provision
fundamentally is designed to prevent U.S. Bank from obtaining insurance coverage for losses
due to unpaid loans, which are not at issue here. And it is untenable because, taken to its
extent, the provision would bar coverage of any professional-liability claim relating to U.S.
Bank’s lending operations. The parties could not have intended to exclude from coverage
such a large swath of potential claims.
Second, the Insurers’ application of the Extension-of-Credit Provision erroneously
assumes that the settlement was based on an extension of credit. The class actions alleged
that the overdraft fees were charged against transactions while there still were positive
balances in customers’ accounts—before any overdraft protection was extended. Thus, the
assessment of those fees, and their repayment as required by the settlement, were based on
the use of high-to-low posting and not on an extension of credit.
For those two reasons, the Insurers’ reliance on the Extension-of-Credit Provision to
assert that the settlement is not a covered loss under the policies is likewise misplaced.

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CONCLUSION
At this stage of the proceedings, the Insurers have not clearly established as a matter
of law that either the Uninsurable Provision or the Extension-of-Credit Provision prevents
the settlement from being a covered loss under the insurance policies. Accordingly, IT IS
HEREBY ORDERED that:
1.

Indian Harbor’s Motion for Judgment on the Pleadings (Docket No. 46) is
DENIED; and

2.

ACE American’s Motion for Judgment on the Pleadings (Docket No. 48) is
DENIED.

Dated: July 3, 2014

s/ Paul A. Magnuson
Paul A. Magnuson
United States District Court Judge

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