Chubb unit prevails in coverage dispute with bank

A federal appeals court on Thursday upheld a lower court ruling that found a unit of Chubb Ltd. did not have to cover BancorpSouth Inc. for a $24.6 million settlement of class claims where the bank was charged with collecting excessive overdraft fees.

In BancorpSouth v. Federal Insurance Co., the 7th U.S. Circuit Court of Appeals in Chicago agreed with a ruling by the U.S. District Court in Indianapolis that found Chubb subsidiary Federal Insurance Co. had no duty to defend or indemnify Tupelo, Mississippi-based BancorpSouth because overdraft fees were excluded.

The ruling stems from a case where plaintiff Shane Swift had filed a class action in the Florida federal court in May 2010, claiming that BancorpSouth maximized the amount of overdraft fees it could charge customers through a variety of means, policies and procedures.

“The essence of the Swift Complaint is clearly Bancorp’s maximization of overdraft fees,” a unanimous three-judge panel of the 7th Circuit said in its ruling. “Since there is no other way to construe the Swift Complaint, Federal had no duty to defend the overdraft fees claims because they are excluded from coverage.”

BancorpSouth allegedly reordered debits from highest to lowest, instead of chronologically, failed to provide accurate balance information, and purposefully delayed posting transactions. Bancorp also failed to notify customers of overdrafts, and failed to inform their costumers that they could opt out of BancorpSouth’s overdraft policy upon request.

On Feb. 24, 2016, BancorpSouth agreed to pay $24 million to the class plaintiffs to resolve all the claims, according to the ruling. Bancorp notified Federal of the Swift complaint and sought coverage for both defending the lawsuit, and indemnifying the cost of settlement. Federal denied all coverage.

BancorpSouth filed a complaint against Federal alleging breach of contract and bad faith denial of coverage. Federal filed a motion to dismiss the complaint, citing an exclusion of coverage in their policy with BancorpSouth for any claim “based upon, arising from, or in consequence of any fees or charges,” and the lower court agreed. 

In appealing the lower court ruling, BancorpSouth cited paragraphs in the Swift complaint that, on their face, have no mention of overdraft fees. However, the appeals court wrote that “these individual allegations cannot be read in a vacuum, and instead, must be read in the context of the entire complaint.”

“As the district court rightly concluded,” the appeals court wrote, “the gravamen of the Swift complaint is the imposition of overdraft fees, and the allegations in the complaint detail particular policies and practices that assisted in maximizing the assessment and collection of overdraft fees.”

BancorpSouth did not respond to a call for comment. A Chubb spokesman said the insurer does not comment on litigation.