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United States Bank N.A. v. Indian Harbor Insurance Co.

United States District Court, D. Minnesota

December 16, 2014

U.S. Bank National Association and U.S. Bancorp, Plaintiffs,
Indian Harbor Insurance Company and ACE American Insurance Company, Defendants

For U.S. Bank National Association a national banking association, U.S. Bancorp a Delaware corporation, Plaintiff: Marshall Gilinsky, PRO HAC VICE, LEAD ATTORNEY, Anderson Kill P.C., Burlington, VT; Patrick J Boley, LEAD ATTORNEY, John M Bjorkman, Larson King, LLP, St Paul, MN; Vivian Costandy Michael, PRO HAC VICE, LEAD ATTORNEY, Anderson Kill PC, New York, NY; William G Passannante, PRO HAC VICE, LEAD ATTORNEY, Anderson Kill P.C., New York, NY.

For Indian Harbor Insurance Company a North Dakota corporation, Defendant: Amy L Schwartz, Richard T Thomson, LEAD ATTORNEYS, Lapp Libra Thomson Stoebner & Pusch, Chartered, Mpls, MN; Tammy Yuen, PRO HAC VICE, James Sandnes, PRO HAC VICE, LEAD ATTORNEYS, Boundas Skarzynski Walsh & Black, New York, NY.

For ACE American Insurance Company a Pennsylvania corporation, Defendant: Edward P Gibbons, PRO HAC VICE, Tiffany Saltzman-Jones, PRO HAC VICE, LEAD ATTORNEYS, Walker Wilcox Matousek LLP, Chicago, IL; Alec J Beck, Ford & Harrison LLP, Minneapolis, MN.

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Paul A. Magnuson, United States District Court Judge.

This matter is before the Court on U.S. Bank's Motion for Summary Judgment. For the reasons that follow, the Court grants the Motion.


This is a fiercely contested insurance case. U.S. Bank National Association and U.S. Bancorp (collectively " U.S. Bank" ) are suing Indian Harbor Insurance Company and ACE American Insurance Company (collectively the " Insurers" ) for coverage of both $30 million out of a $55 million settlement payment and related defense costs in an overdraft-fee dispute. Though the issues are complicated, the facts are straightforward.

A. Overdraft Fees

U.S. Bank, like many banks, offers overdraft protection to its customers with checking accounts. When customers attempt transactions for more money than is in their accounts, they overdraw the accounts. As a service, U.S. Bank pays the transactions. To compensate for that service, U.S. Bank charges a fee for each overdraft. Customers are assessed overdraft fees for transactions that initially overdraw their accounts and for additional transactions until they deposit funds to cover the overdrafts.

Because U.S. Bank charges customers overdraft fees for transactions that either cause their accounts to be overdrawn or happen while their accounts are overdrawn,

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the point at which the accounts become overdrawn--and thus the order in which the transactions post to the accounts--matters. If smaller transactions post before larger transactions, the accounts will deplete and become overdrawn at a slower rate, fewer transactions will remain to post after the accounts became overdrawn, and fewer overdraft fees will be assessed for the remaining transactions. But if larger transactions post before smaller transactions, the opposite will occur.

To illustrate, take this example. A customer has $200 in her checking account. Her bank charges a $25 fee each time she overdraws the account. One day, she makes five purchases with her debit card in this order: $4 café Americano, $20 dozen doughnuts for the office, $30 birthday gift for her daughter, $300 airplane ticket to Florida, and $50 theater tickets. If the transactions post to her account from smallest to largest, only the airplane ticket will overdraw the account and incur one overdraft fee of $25. If the transactions post chronologically, both the airplane ticket and the theater tickets will overdraw the account and incur two overdraft fees of $50. And if the transactions post from largest to smallest, all the transactions will overdraw the account and incur five overdraft fees of $125.

B. Underlying Class Actions

Beginning in 2009, three class actions were brought against U.S. Bank for overcharging overdraft fees to its customers.[1] (Gilinsky Aff. (Docket No. 128) Exs. 1-3.) In particular, the class actions alleged that U.S. Bank unlawfully engaged in high-to-low posting--in that it posted customers' debit-card transactions to their checking accounts from largest to smallest--to create the most overdrafts and maximize the assessed overdraft fees. (Id.) The class actions also alleged that U.S. Bank inadequately disclosed to its customers that it posted their transactions from high to low. (Id.) The class actions asserted claims for breach of contract, unconscionability, conversion, and unjust enrichment; and sought remedies of declaratory relief, return of the excess overdraft fees, and damages. (Id.) Eventually, the class actions were transferred to a multi-district litigation in the Southern District of Florida.[2] (Savage Aff. (Docket No. 127) ¶ 2.)

At the time, U.S. Bank maintained professional-liability insurance with the Insurers. (Gilinsky Aff. Exs. 4-5.) It had purchased a primary policy from Indian Harbor with a $20 million liability limit, subject to a $25 million deductible. (Gilinsky Aff. Ex. 4.) It had also purchased an excess policy from ACE American with a $15 million liability limit. (Gilinsky Aff. Ex. 5.) The policies grant coverage for " Loss which [U.S. Bank] shall become legally obligated to pay as result of any Claim first made against [it] during the Policy Period arising out of any Wrongful Act committed by [it] during or prior to the Policy Period while performing Professional Services." (Gilinsky Aff. Ex. 4, at 15.) The policies further require that U.S. Bank obtain the Insurers' consent before settling a claim. (Id. at 17.)

In 2012, U.S. Bank entered into private mediation to resolve the class actions and discovered an opportunity to reach a settlement. (Savage Aff. ¶ 9.) Complying with the policies, it asked the Insurers for

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consent. (Id. ¶ 10.) Indian Harbor consented to a settlement of $45 million and ACE American consented to a settlement of $60 million, yet both Insurers reserved their rights to later challenge coverage. (Gilinsky Aff. Exs. 26-27.) Having received the Insurers' consent, U.S. Bank settled the class actions in 2013 for $55 million. (Gilinsky Aff. Exs. 25, 28.) Under the settlement, U.S. Bank agreed to pay the $55 million into a fund to be allocated among the class members. (Id.) But U.S. Bank did not admit liability on the claims. (Id.) Nor did the settlement characterize the payment as restitution. (Id.)

C. Current Coverage Lawsuit

U.S. Bank next sought insurance coverage from the Insurers for the amount paid to defend against and settle the class actions. (See Savage Aff. ¶ 12.) Within the policy terms, it 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.)

The Insurers denied coverage, principally on the ground that the settlement was not a " Loss" under the policies. (Id.; Gilinsky Aff. Ex. 31.) The policies define " Loss" as " the total amount which [U.S. Bank] becomes legally obligated to pay on account of each Claim . . . in each Policy Period . . . made against [it] for Wrongful Acts . . . including, but not limited to, damages, judgments, settlements, costs, pre-judgment and post-judgment interest and Defense Costs." (Gilinsky Aff. Ex. 4, at 21.) The policies except from the loss definition, 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. at 22.) And although it may be a loss, the policies exclude from coverage " any payment for Loss in connection with any Claim made against [U.S. Bank] . . . brought about or contributed in fact by any . . . profit or remuneration gained by [U.S. Bank] to which [it] is not legally entitled . . . as determined by a final adjudication in the underlying action" (the " Ill-Gotten ...

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