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BancorpSouth, Inc. v. Federal Insurance Co.

United States Court of Appeals, Seventh Circuit

October 12, 2017

BancorpSouth, Incorporated, Plaintiff-Appellant,
v.
Federal Insurance Company, Defendant-Appellee.

          Argued September 7, 2017

         Appeal from the United States District Court for the Southern District of Indiana, Indianapolis Division. No. l:16-cv-01871-SEB-DML - Sarah Evans Barker, Judge.

          Before Wood, Chief Judge, and Bauer and Sykes, Circuit Judges.

          BAUER, CIRCUIT JUDGE.

         On May 18, 2010, Shane Swift filed a class action lawsuit on behalf of himself and others similarly situated against BancorpSouth, Incorporated ("Bancorp") in the Northern District of Florida based upon its assessment and collection of excessive overdraft fees. On February 24, 2016, Bancorp and Swift entered into a settlement agreement wherein Bancorp agreed to pay $24 million to the settlement class. Bancorp had previously notified its insurer, Federal Insurance Company ("Federal"), that it sought coverage for defending the lawsuit, and eventually, to indemnify the settlement costs. Federal denied all coverage, and consequently, Bancorp filed a complaint against Federal alleging breach of contract, as well as bad faith denial of coverage. Federal filed a motion to dismiss the complaint, citing an exclusion of coverage in their policy with Bancorp for any claim "based upon, arising from, or in consequence of any fees or charges." The district court granted Federal's motion to dismiss, and Bancorp appealed. We affirm.

         I. BACKGROUND

         Bancorp, a Mississippi corporation, is a financial institution which provides, among other things, checking and savings accounts to individuals. In November of 2009, Bancorp purchased a bankers' professional liability insurance policy from Federal. The first paragraph of the policy, titled "Insuring Clause, " outlined Federal's obligation under the policy:

[Federal] shall pay, on behalf of an Insured, Loss on account of any Claim first made against such Insured during the Policy Period ... for a Wrongful Act committed by an Insured or any person for whose acts the Insured is legally liable while performing Professional Services, including failure to perform Professional Services.

         Under the policy, a "Claim" is defined, inter alia, as a "written demand for monetary damages, " or "a civil proceeding commenced by the service of a complaint or similar pleading" brought on behalf of a customer. "Loss" is defined as "the amount that an Insured becomes legally obligated to pay on account of any covered Claim, " which includes both settlement costs, as well as "Defense Costs" or attorneys' fees. The policy also contained a number of exclusions from coverage, only one of which is relevant here. The relevant exclusion stated 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" ("Exclusion 3(n)").

         On May 18, 2010, Shane Swift, on behalf of himself and others similarly situated, filed a lawsuit against Bancorp in the Northern District of Florida ("Swift Complaint"). The Swift Complaint's opening allegation stated: "This is a civil action seeking monetary damages, restitution and declaratory relief from [Bancorp] arising from its unfair and unconscionable assessment and collection of excessive overdraft fees." The Swift Complaint alleged that Bancorp maximized the amount of overdraft fees it could charge customers through a variety of means, policies, and procedures. First, according to the Swift Complaint, Bancorp reordered debits from highest to lowest, instead of chronologically. Second, Bancorp failed to provide accurate balance information, and purposefully delayed posting transactions. Third, Bancorp failed to notify customers of overdrafts, despite having the capability to ascertain at the point of sale whether there were sufficient funds in a customer's account. Finally, Bancorp failed to make their custom- ers aware that they can opt out of Bancorp's overdraft policy upon request.

         The Swift Complaint asserted claims for breach of contract, unconscionability conversion, unjust enrichment, and a violation of the Arkansas Deceptive Trade Practice Act. Importantly, Swift sought to represent a class of "[a]ll Bancorp-South customers in the United States who ... incurred an overdraft fee as a result of BancorpSouth's practice of re-sequencing debit card transactions from highest to lowest."

         On February 24, 2016, Bancorp and Swift entered into a settlement agreement. Bancorp agreed to pay $24 million to the class plaintiffs to resolve all the claims, $8.4 million of which was set aside for attorney's fees, plus $500, 000 in class administrative costs.

         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.

         Bancorp then filed a complaint alleging two breach of contract claims: that Federal breached its duty under the policy to defend against the Swift Complaint and pay attorneys' fees (Count One); and, that Federal breached the duty to indemnify Bancorp for the cost of settlement (Count Two). Additionally, the complaint alleged bad faith denial of coverage by Federal (Count Three). Federal filed a Rule 12(b)(6) motion to dismiss for failure to state a claim on the grounds that Swift's claims regarding the overdraft fees ...


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