Georgia Court Holds No Coverage for Restitutionary Amounts

In its recent decision in Fidelity Bank v. Chartis Specialty Ins. Co., 2013 U.S. Dist. LEXIS 110935 (N.D. Ga. Aug. 7, 2013), the United States District Court for the Northern District of Georgia had occasion to consider whether an insured was entitled to indemnification for return of ill-gotten gains.

Chartis insured Fidelity under a Management and Professional Liability for Financial Institutions Policy.  Fidelity sought coverage for an underlying class action lawsuit brought by customers alleging that the fees charged by Fidelity for overdrafts amounted to a usurious interest charge in violation of Georgia law.  The underlying suit pled causes of action against Fidelity for violations of Georgia’s civil and criminal usury laws, for conversion, and for money had and received.  Chartis agreed to reimburse Fidelity for its defense in the underlying suit, but took the coverage position that Fidelity would not be entitled to indemnification for any amounts awarded.  Fidelity subsequently settled with the underlying plaintiffs and then commenced a declaratory judgment action against Chartis.  Specifically, Fidelity sought indemnification of the settlement amounts pursuant to the policy’s professional liability part, under which Chartis agreed to pay losses resulting from wrongful acts of Fidelity in the rendering or failure to render “professional services,” a term defined, in relevant part, to mean services, including online banking services, provided to clients for customers or clients in return for a fee.

On motion for summary judgment, Chartis argued that it had no indemnity obligations to Fidelity for several reasons.  First, Chartis argued that the Fidelity’s conduct was not a “wrongful act” as that term was defined by its policy (i.e., an act, error or omission), but instead a deliberate business decision to charge overdraft fees.  Chartis also argued that the underlying suit did not arise out of Fidelity’s “professional services.”  More significantly to the court, Chartis argued that the settlement amounts were uninsurable as a matter of law and that in any event, the policy contained an exclusion stating that Chartis is not:

… liable to make any payment for Loss in connection with any Claim made against any Insured . . . alleging, arising out of, based upon or attributable to, directly or indirectly, any dispute involving fees, commissions or other charges for any Professional Service rendered or required to be rendered by the Insured, or that portion of any settlement or award representing an amount equal to such fees, commissions or other compensations; provided, however, that this exclusion shall not apply to Defense Costs incurred in connection with a Claim alleging a Wrongful Act;

While the court rejected Chartis’ first two arguments concerning professional services and wrongful acts, it found the latter two arguments compelling.  Requiring Chartis to indemnify Fidelity for amounts it wrongfully charged its clients in the first instance, explained the court, would result in a windfall since such a ruling would mean that Fidelity “is free to collect fees and make profits from its customers through illegal conduct, and the insurer is on the hook when the customers sue while Plaintiff keeps the ill-gotten gains.”  While the court acknowledged the lack of any Georgia case law addressing the issue, it observed that courts in many states have held that one cannot insure against the risk of having to return money or property wrongfully acquired.  Ultimately, however, in an effort to avoid announcing a “new” rule under Georgia law, the court reached its holding on the basis of the policy exclusion, which it noted “speaks to exactly this type of claim.”  Thus, the court held that Chartis had no indemnity obligation in connection with the underlying suit.