Archive for August 2013

Claim for forged checks covered under forgery coverage of Financial Institution Bond No. 24 because checks were “finally paid” under Michigan Uniform Commercial Code

August 23rd, 2013 — 6:33pm

by Chris Graham and Joseph Kelly

Seaway Community Bank v. Progressive Casualty Insurance Co., Case No. 11-2575 (6th Cir. Aug. 8, 2013)

A customer of Seaway Community Bank deposited three checks payable to him via a Canadian bank over a span of four months. Seaway cashed the checks – but the checks were fraudulent as the original payee on the checks was deleted and Seaway’s customer’s name was added as payee.

Seaway submitted a proof of loss to Progressive and sought coverage under Insuring Agreement D which provides coverage for:

Loss resulting directly from the Insured [Seaway] having, in good
faith, paid or transferred any Property in reliance on any Written,
Original (1) Negotiable Instrument . . . which . . . is altered, but
only to the extent the alteration causes the loss.

Progressive denied coverage based on Exclusion O which excludes coverage “loss resulting directly or indirectly from payments made or withdrawals from a depositor’s account involving items of deposit which are not finally paid for any reason, including but not limited to Forgery or any other fraud. . .”

The District Court granted summary judgment in favor Seaway and the Sixth Circuit affirmed. The Sixth Circuit outlined the process of check cashing generally and under Michigan law, stating in pertinent part:

  • The check-collection process begins when a customer deposits a check for collection in a “depository” bank, defined as “the first bank to which an item is transferred for collection even though it is also the payor bank.”
  • Here, Seaway was the depository bank. Seaway paid its customer, and then it sought payment on each check he had deposited by transferring each of them through one or more “intermediary” banks, defined as “any bank to which an item is transferred in the course of collection except the depository or payor bank.”
  • Each bank in the collection process “settles” for a check by various means, including by paying cash.
  • Giving credit to the prior intermediary bank is the most common method of settlement.
  • In other words, each intermediary bank that transfers the check to the next intermediary bank receives a provisional credit from the transferee, with the penultimate intermediary bank in the collection chain receiving its provisional credit from the bank upon which it was drawn, called the “payor” bank, which means “`a bank by which an item is payable as drawn or accepted.'”
  • Here, the payor bank for each of the checks was a Canadian bank.
  • To revoke a settlement, the payor bank must return the item before its midnight deadline, defined as “midnight on its next banking day following the banking day on which it receives the relevant item or notice or from which the time for taking action commences to run, whichever is later.”
  • If the payor bank decides not to finally pay the check—perhaps because it is fraudulent—then these provisional credits are reversed. Whether the payor bank decides to finally pay the check or dishonor it, under Article 4 of the Uniform Commercial Code, the payor bank must take action before midnight on the next banking day following the banking day on which the payor bank receives the check. This is known as the “midnight deadline” rule.
  • Under the midnight deadline rule, if the payor bank receives a check and does nothing by midnight on the following banking day, then the bank must pay the check.
  • Here, the checks from the Canadian payor bank were “finally paid” as that phrase is defined in the Uniform Commercial Code. Progressive states that the Uniform Commercial Code, and the midnight deadline rule, do not apply to Canadian banks. Therefore, the Canadian payor bank in this case could—and did—decide days after receiving the checks from the collecting bank that it was going to dishonor the checks because they were fraudulent.
  • The Canadian bank reversed the provisional credits all the way down the chain to Seaway. Because the fraudulent checks at issue in this case could never be “finally paid,” Progressive argues, they fall under Exclusion (o), which provided that Progressive did not have to pay Seaway for losses incurred on checks not “finally paid.”
  • The phrase “finally paid” has a clear meaning within the banking industry: it means when the midnight-deadline rule applies under the Uniform Commercial Code.

In conclusion, the Sixth Circuit held:

  • The Exclusion does not say whether or not checks drawn on Canadian banks are to be exempted from Michigan’s version of the Uniform Commercial Code’s definition of “not finally paid.” Applying the Uniform Commercial Code, the checks were finally paid. Therefore, Exclusion (o) could not apply, and Progressive must indemnify Seaway.

Comment » | Financial Institution Bond Blog

No coverage under D&O policy for class action suit based on bank’s alleged usurious interest charges

August 15th, 2013 — 2:41am

by Chris Graham and Joseph Kelly

Fidelity Bank v. Chartis Specialty Insurance Company, Case No. 1:12-CV-4259-RWS (N.D. Ga. August 7, 2013)

A class action suit was filed by customers of Fidelity Bank alleging Fidelity charged overdraft fees that were usurious interest charges in violation of Georgia law. Fidelity tendered the defense and indemnity of the suit to Chartis, its D&O insurer. Chartis agreed to defend Fidelity in the suit but wouldn’t indemnify the bank for any judgment or settlement. Fidelity settled the class action suit and then sued Chartis claiming it had a duty to indemnify Fidelity. Chartis then moved for summary judgment, which the District Court granted for two reasons.

First, the court held that the amounts sought in the class action were uninsurable, stating:

“To require [Chartis] to pay restitution for amounts [Fidelity] collected pursuant to illegal practices would result in a windfall to [Fidelity]. If this Court were to require [Chartis] to indemnify [Fidelity] under these facts, it would amount to a ruling that [Fidelity] is free to collect fees and make profits from its customers through illegal conduct, and [Chartis] is on the hook when the customers sue while [Fidelity] keeps the ill-gotten gains.”

Second, the court held that the professional services exclusion applied. That exclusion provides 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[.]” “Professional Services” are defined as “those services, including online banking services, of the Company as set forth in an endorsement to this policy by the Insurer, which services are permitted by law or regulation, to be rendered by an Insured pursuant to a written agreement with the customer or client as long as such service is rendered for a fee, commission or other compensation (“Compensation”), or (ii) without Compensation as long as such non-compensated services are rendered in conjunction with services rendered for Compensation.”

The Court stated that “it is clear that [the professional services exclusion] speaks to exactly this type of claim” and “excludes from indemnification (but not defense) disputes involving fees and commissions or, in other words, amounts that Plaintiff was accused of wrongfully or excessively charging its customers.”

Comment » | D&O Digest

D&O policy covered multiplied portion of attorneys’ fees

August 15th, 2013 — 2:31am

by Chris Graham and Joseph Kelly

Carolina Casualty Ins. Co. v. Merge Healthcare Solutions, Inc., Case Nos. 12-2275 & 12-2341 (7th Cir. July 16, 2013)

D&O insurer sought summary judgment that multiplied portion of attorneys’ fee award was multiplied damages and not covered. Applying Illinois law, Judge Easterbrook denied insurer’s summary judgment motion.

Amicas, Inc. agreed to merge with Thoma Bravo, LLC with Amicas shares valued at $5.35 for the transaction. Some Amicas shareholders filed suit in Massachusetts seeking an injunction. That case settled after Merge offered $6.05 per share. The court awarded the shareholders’ lawyers their fees – namely, $3,150,000 based on a lodestar of $630,000 multiplied by five based on the risk of nonpayment and the favorable result.

Carolina Casualty, in litigation in the Northern District of Illinois, didn’t dispute the $630,000 lodestar was covered, but disputed coverage for the multiplied portion of the fee award. The District Court found the entire fee award was covered. Carolina Casualty appealed.

Carolina Casualty relied on the policy’s definition of Loss, which stated in pertinent part:

“Loss shall not include civil or criminal fines or penalties imposed by law, punitive or exemplary damages, the multiplied portion of multiplied damages, taxes, any amount for which the Insureds are not financially liable or which are without legal recourse to the Insureds, or matters which may be deemed uninsurable under the law pursuant to which this Policy shall be construed.”

The 7th Circuit concluded that an award of attorneys’ fees is different than “damages”.

The Court stated “[t]he context of the phrase ‘multiplied portion of multiplied damages’ tells us that treble damages and the like are the target.”

The Court focused on the list of items excluded from “Loss” “covers a category of losses that insurers regularly exclude to curtail moral hazard—the fact that insurance induces the insured to take extra risks.”

The Court further noted “Adversaries’ attorneys’ fees in commercial litigation are not remotely like punitive damages, trebled damages, or criminal fines and penalties.”

The Seventh Circuit thus concluded the entire $3,150,000 fee award was covered under Carolina Casualty’s policy.

Comment » | D&O Digest

Court: D&O Insurer properly denied coverage based on regulatory exclusion for FDIC claims against former directors and officers of failed bank

August 15th, 2013 — 2:29am

by Chris Graham and Joseph Kelly

Reis, et al v. Federal Insurance Co., Case No. CV-11-09835 (C.D. Cal. July 12, 2013)

Federal issued a D&O policy to Alliance Bank of Culver City, California. Alliance Bank was shut down and the FDIC as receiver for the Alliance notified Federal that it had grounds to bring claims of negligence and breach of fiduciary duty against Alliance’s directors and officers and made a monetary demand for those claims.

Federal declined coverage, in part, based on its policy’s regulatory exclusion, which provided:

“[A]s respects the Directors & Officers Liability Coverage Section(s) of this policy, the Company shall not be liable for Loss on account of any Claim by, on behalf of, or at the behest of . . . [the] Federal Deposit Insurance Corporation. . . in any capacity whatsoever.”

Two years later, the former directors and officers sued Federal for breach of contract and bad faith. The District Court granted Federal’s motion for summary judgment, holding that “the FDIC’s claim against [the former directors and officers] was the type of claim contemplated by the Regulatory Exclusion Endorsement” and that Federal thus didn’t breach its contractual duties or act in bad faith in denying coverage based on the regulatory exclusion.

Comment » | D&O Digest

Insured’s untimely notice precluded coverage despite lack of prejudice to D&O insurer

August 15th, 2013 — 2:25am

by Chris Graham and Joseph Kelly

Secure Energy, Inc. v. Philadelphia Indemnity Insurance Company, Case No. 4:11CV1636TIA (E.D. Mo. May 15, 2013)

Philadelphia Indemnity issued D&O policies to Secure Energy, Inc. annually from October 11, 2007 to October 11, 2012.

On December 28, 2007, Secure Energy’s Board of Directors received a demand from its salesman for money owed for commissions. The salesman filed suit on May 16, 2008, but not against Secure Energy. Secure Energy was added as a defendant on April 13, 2009. The suit was voluntarily dismissed on June 25, 2009 and re-filed on July 8, 2009. Secure Energy didn’t give notice to its D&O insurer until May 4, 2011.

The policy provided, in pertinent part:

“In the event that a Claim is made against the Insured, the Insured shall, as a condition precedent to the obligations of the Underwriter under this Policy, give written notice to the Underwriter as soon as practicable after any of the directors, officers, governors, trustees, management committee members, or members of the Board of Members first become aware of such Claim, but, no later than 60 days after the expiration of this Policy, Extension Period, or Run-Off Policy, if applicable.”

Philadelphia moved for summary judgment arguing there was no coverage under its policy due to Secure Energy’s late notice.

Relying on Missouri Supreme Court precedent, the District Court stated that “Notice must be given to the insurer during the policy period. If the insured does not give notice within the contractually required policy period, there is simply no coverage under a claims made policy, whether or not the insurer was prejudiced.”

Secure Energy’s late notice thus precluded coverage even without prejudice to Philadelphia.

Comment » | D&O Digest

Back to top