Illinois – Professional Liability Policy – Breach of Contract – Bad Faith – Duty to Defend – Duty to Indemnify

2017 WL 4546144

Seventh Circuit.

BANCORPSOUTH,
INCORPORATED, Plaintiff-Appellant,

v.

FEDERAL
INSURANCE COMPANY, Defendant-Appellee.

No. 17-1425

Argued September 7,
2017Decided October 12, 2017

Opinion

Bauer, Circuit Judge.

*1 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 customers aware that they can opt out of Bancorp’s overdraft policy upon
request.

*2 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 BancorpSouth customers in the United States who …
incurred an overdraft fee as a result of BancorpSouth’s practice of resequencing 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 were excluded from coverage under
Exclusion 3(n) since the claims were “based upon, arising from, or were in
consequence of fees or charges.”

The district court
found that Exclusion 3(n) unambiguously excludes from coverage losses arising
from fees. Accordingly, since the claims alleged in the Swift Complaint arose
from the imposition of excessive overdraft fees, the district court ruled that
Exclusion 3(n) applied, and Federal had no duty to defend or indemnify. Thus,
the district court dismissed the two breach of contract claims, and also
dismissed the bad faith claim since there was no longer an underlying
contractual breach upon which Bancorp could recover. Bancorp timely appealed. 

II. DISCUSSION

“A federal court
sitting in diversity ‘must attempt to resolve issues in the same manner as
would the highest court of the state that provides the applicable law.’ ” Netherlands
Ins. Co. v. Phusion Projects, Inc., 737 F.3d 1174, 1177 (7th Cir. 2013)
(quoting Stephan v. Rocky Mountain Chocolate Factory, Inc., 129
F.3d 414, 416–417 (7th Cir. 1997)). Here, the parties agree that Mississippi
law applies, under which “[t]he interpretation of an insurance policy is a
question of law.” Noxubee Cty. Sch. Dist. v. United Nat’l Ins. Co.,
883 So.2d 1159, 1165 (Miss. 2004).

Bancorp argues that
the district court improperly dismissed Count One by exclusively focusing on
the allegations in the Swift Complaint regarding the overdraft fees. According
to Bancorp, the district court overlooked other allegations concerning
Bancorp’s general policies and procedures which are the primary sources of harm
alleged in the Swift Complaint.

Under
Mississippi law, the determination of whether an insurance company has a duty
to defend depends upon the comparison of the language contained in the policy
with the allegations contained in the complaint in the underlying action. Minnesota
Life Ins. Co. v. Columbia Cas. Co., 164 So.3d 954, 970 (Miss. 2014). Thus,
we must compare the policy language, in particular Exclusion 3(n), which
excludes from coverage any claim “based upon, arising from, or in consequence
of any fees or charges,” with the allegations contained in the Swift Complaint.

To support its
argument that the injuries asserted in the Swift Complaint were primarily
caused by Bancorp’s general policies and practices, Bancorp points to a variety
of paragraphs in the Swift Complaint that, on their face, have no mention of
overdraft fees. For example, paragraph 35 alleges:

BancorpSouth misleads its customers regarding its
reordering practices, as the Bank does not state unequivocally in its contract
that it will reorder debits from highest to lowest. Thus, the Deposit Agreement
is deceptive and/or unfair because it is, in fact, the Bank’s practice to
always reorder debits from highest to lowest.

However, these
individual allegations cannot be read in a vacuum, and instead, must be read in
the context of the entire complaint. Immediately preceding the above
allegation, the Swift Complaint ties the deceptive Deposit Agreement and
reordering practice directly to Bancorp’s maximization of overdraft fees: “In
an effort to maximize overdraft revenue, BancorpSouth manipulates debits from highest to
lowest during given periods of time. BancorpSouth reorders transactions for no reason
other than to increase the number of exorbitant overdraft fees it can
charge….”

Read in its entirety,
the only harm alleged by the Swift Complaint is Bancorp’s maximization of
excessive overdraft fees on its customers. The very first paragraph of the
Swift Complaint specifically states that the crux of the lawsuit centers on
Bancorp’s “unfair and unconscionable assessment and collection of excessive
overdraft fees.” Moreover, the complaint defines the class of plaintiffs as
customers who “incurred an overdraft fee.” Finally, every claim for relief
asserted is specifically premised on the imposition of overdraft fees. To be
sure, language focusing on “overdraft policies and procedures” appears in a
number of places, but it is always connected with the wrongful collection or
imposition of overdraft fees.

Accepting Bancorp’s
argument that the primary harm alleged is Bancorp’s general policies and
procedures would require us to uncouple allegations, read them in isolation,
and disregard their context. When the Swift Complaint details a particular
Bancorp policy or practice, such as failing to provide customers with accurate
balance information, it still directly relates to the underlying harm—the
assessment and collection of excessive overdraft fees. In other words, there is
no policy or practice alleged that exists independent of the overdraft fee
scheme. As the district court rightly concluded, 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.

The parties directed
us to two unpublished opinions from our sister circuits which reached opposite
conclusions when confronted with a similar set of facts, although neither of
them dealt squarely with Mississippi law. A case from the Fifth Circuit, relied
on by Bancorp, analyzed whether an insurer was obligated to provide coverage
based on a similar complaint alleging an “unfair and unconscionable assessment
of excessive overdraft fees[,]” and a nearly identical exclusion of claims
“based upon, arising out of or attributable to any dispute involving fees or charges….” First
Cmty. Bancshares v. St. Paul Mercury Ins. Co., 593 Fed.Appx. 286, 288 (5th
Cir. 2014) (applying Texas law). Crucial to the Fifth Circuit’s holding that
the insurance company owed a duty to defend was its finding that the primary
harm was not the assessment and collection of fees, but rather “that customers
could not ascertain their account balances and could not accurately plan
spending, withdrawals, and deposits.” Id. at 290. Yet, as the
district court here concluded, the overdraft fees in the Swift Complaint were
not an additional harm among many. The excessive overdraft fees were the
central and only harm.

More
persuasive is the case from the Third Circuit, relied on by Federal, which
reached an opposite conclusion involving a policy exclusion for “fees,
commissions or charges for Professional Services paid or payable to an
Insured.” PNC Fin. Servs. Grp., Inc. v. Houston Cas. Co., 647
Fed.Appx. 112, 120 (3d Cir. 2016) (applying Pennsylvania law). In finding no
duty to indemnify, the Third Circuit concluded that the essence of the claims
resulted from the bank’s policy of charging overdraft fees. Id. at
121. The court specifically noted that the class was defined as those who
incurred an overdraft fee, and that the settlement payments were based on the
number of overdraft fees incurred. Id.

The essence of the
Swift Complaint is clearly Bancorp’s maximization of overdraft fees. 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. The
district court correctly dismissed Count One.

 It is worth noting
that an insurance company’s decision in a banker’s liability policy to exclude
losses “based upon, arising from, or in consequence of fees” serves a necessary
purpose of avoiding a “moral hazard.” See, e.g., A.M.I.
Diamonds Co. v. Hanover Ins. Co., 397 F.3d 528, 530 (7th Cir. 2005) (“Moral
hazard refers to the effect of insurance in causing the insured to relax the
care he takes to safeguard his property because the loss will be borne in whole
or part by the insurance company.”). If the policy contained no such exclusion,
Bancorp could freely create other customer fee schemes knowing that they would
be readily reimbursed by Federal. In other words, the amount of coverage would
be completely in the hands of the insured, Bancorp, which would be in a position
to profit from its bad acts.

Bancorp also argues
that the district court erred in finding Exclusion 3(n) unambiguous. Bancorp
contends that the district court’s broad interpretation of Exclusion 3(n) would
render coverage for “Defense Costs,” defined in the policy to include
attorneys’ fees, illusory.

Under
Mississippi law, “insurance policies are contracts, and as such, they are to be
enforced according to their provisions.” Noxubee Cty., 883 So.2d at
1166. “[W]hen the words of an insurance policy are plain and unambiguous, the
court will afford them their plain, ordinary meaning and will apply them as
written.” Id. at 1165. Ambiguous or unclear language will be
resolved in favor of the insured. Id. “Mere disagreement as to
the meaning of a policy provision does not render the policy ambiguous.” S.
Healthcare Servs., Inc. v. Lloyd’s of London, 110 So.3d 735, 744 (Miss.
2013). Rather, “[a]mbiguities exist when a policy can be logically interpreted
in two or more ways.” United States Fid. & Guar. Co. of Mississippi
v. Martin, 998 So.2d 956, 963 (Miss. 2008). “[P]rovisions that limit or
exclude coverage are to be construed liberally in favor of the insured.” Noxubee
Cty., 883 So.2d at 1165. However, because insurance policies are contracts,
“insurance companies must be able to rely on their statements of coverage,
exclusions, disclaimers, definitions, and other provisions, in order to receive
the benefit of their bargain and to ensure that rates have been properly
calculated.” Id. at 1166.

As a threshold
matter, there is nothing ambiguous about exactly what is excluded from coverage
under Exclusion 3(n). The exclusion itself is plain and ordinary—the policy
does not cover claims “based upon, arising from, or in consequence of any fees
or charges.” The district court correctly rejected Bancorp’s argument in the
district court about whether this meant fees payable to or by Bancorp.
The exclusion encompasses “any fees,” which would reasonably include either
type. A broad exclusion of coverage does not equate to ambiguity.

 As to
whether the district court’s interpretation of Exclusion 3(n) conflicts with
the definition of “Defense Costs,” Bancorp seems to have misunderstood the
policy in an effort to create ambiguity and find a route to coverage. The
policy’s definition of “Defense Costs” includes “fees,” i.e.,
attorneys’ fees. Since Exclusion 3(n) bars coverage for “Loss,” which includes
“Defense Costs” (a term that includes attorneys’ fees) Bancorp argues that
Exclusion 3(n) would bar coverage for any claim seeking
reimbursement of attorneys’ fees. This argument is without merit. Exclusion
3(n) only excludes coverage of “Defense Costs,” including attorneys’ fees,
incurred on account of claims against Bancorp that are based upon, arise from,
or are in consequence of fees or charges. The exclusion has no effect on
Bancorp’s recovery of any attorneys’ fees on account of claims that are based
on something other than fees or charges, such as a claim based on the quality
of service provided by Bancorp. We conclude that Exclusion 3(n) is unambiguous.

 Finally, Bancorp
argues that the district court erred in dismissing Count Two, the duty to
indemnify, without drawing reasonable inferences in favor of Bancorp. Under
Mississippi law, the duty to defend is broader than the duty to
indemnify. W.R. Berkley Corp. v. Rea’s Country Lane Const., Inc.,
140 So.3d 437, 442 (Miss. Ct. App. 2013) (citing Titan Indem. Co. v.
Pope, 876 So.2d 1096, 1101 (Miss. Ct. App. 2004)). Whereas a duty to defend
arises whenever an insured faces potential liability under the insurance
contract, the duty to indemnify kicks in only when the insured is found liable
for something that the policy actually covers. Bancorp’s argument assumes
Federal had a duty to defend the Swift Complaint in the first place. Because we
conclude that defending the Swift Complaint was excluded from coverage, Federal
does not owe a duty to indemnify the cost of settling that lawsuit and Count
Two was correctly dismissed. See Evanston Ins. Co. v. Neshoba Cty.
Fair Ass’n, 442 F.Supp.2d 344, 346 n.1 (S.D. Miss. 2006) (stating that “if
there is no duty to defend, there can be no duty to indemnify”); see
also Health Care Indus. Liab. Ins. Program v. Momence Meadows Nursing
Ctr., Inc., 566 F.3d 689, 693 (7th Cir. 2009) (“Where, as here, the duty to
defend is broader than the duty to indemnify, a finding of no duty to defend
necessarily precludes a finding of a duty to indemnify.”).

 Because we conclude
that the district court correctly dismissed Counts One and Two, Count Three
alleging bad faith denial of coverage was also correctly dismissed since there
were no longer underlying claims. Stubbs v. Miss. Farm Bureau Cas. Ins.
Co., 825 So.2d 8, 13 (Miss. 2002) (“An insured seeking to recover on a
claim of bad faith must first establish the existence of coverage on the
underlying claim.”).

 III. CONCLUSION

For the foregoing
reasons, we AFFIRM the district court’s order dismissing Bancorp’s complaint.