I can’t help but think that PNC Financial had a Homer Simpson “D’oh moment” at some point during the litigation in PNC Financial Services Group v. Houston Casualty Company, No. 15-1656 (3rd Cir. May 2, 2016). At issue before the Third Circuit was coverage for $102 million in settlements – Wow! -- of suits involving the manner in which PNC processed debit card and ATM transactions in order to maximize fees for overdrafts. Of particular interest here, the settlements included $30 million for plaintiff’s attorney’s fees. The court held that it was not covered. But could that outcome easily have been different?

Policies issued by two insurers provided coverage for “all Loss for which the Insured becomes legally obligated to pay on account of any Claim first made against the Insured.” “Loss” was defined as “Claims Expenses and Damages.” “Damages” was defined as “a judgment, award, surcharge or settlement ... and any award of pre- and post-judgment interest, attorneys’ fees and costs.”

However, the policies contained exceptions to the definition of “Damages,” including one for “fees, commissions or charges for Professional Services paid or payable to an Insured.” This was referred to as the Professional Services Charge Exception. For various reasons, not important here, the Third Circuit held that the Professional Services Charge Exception applied to preclude coverage for losses that constitute fees or charges. In reaching this conclusion, the federal appeals court affirmed the decision of the District Court.

However, the Third Circuit disagreed with one aspect of the District Court’s decision. The District Court had held that the approximately $30 million awarded to class counsel, as attorneys’ fees and costs, did not fall within the Professional Services Charge Exception. Rather, to the District Court, the amount awarded to class counsel for attorneys’ fees and costs fell within the definition of Damages, which included an “award of ... attorneys’ fees and costs.” Hence, this approximately $30 million represented PNC’s payment of class counsels’ attorneys’ fees and not a refund of fees or charges for Professional Services. Therefore, the District Court held that this amount did not fall within the Professional Services Charge Exception.

However, the appeals court did not see it this way: “PNC did not agree to pay a specific sum to settle the claims related to overdraft fees and additionally pay the attorneys’ fees ultimately awarded to class counsel. Instead, PNC and the class plaintiffs agreed that PNC would pay a lump sum to the class in order to settle their claims and that PNC would have no further obligation once it paid the lump sum. That some money from each common fund was subsequently paid to counsel upon order of the respective courts does not change the purpose of the funds—to resolve the class members’ claims for wrongly collected overdraft fees. Notably, the settlement agreements expressly provided that PNC’s obligation remained the same regardless of how much in attorneys’ fees, if any, the District Courts eventually awarded. Once the District Courts decided to award counsel fees, the parties agreed that the awarded fees and costs would be paid by ‘the plaintiff class as a whole rather than the defendant.’”

In other words, the Third Circuit explained: “[T]he approximately $30 million awarded to class counsel as attorneys’ fees and costs do not constitute an award of attorneys’ fee and costs that PNC was legally obligated to pay. Rather, PNC was legally obligated to pay $102 million to reimburse class members for charged overdraft fees, from which the class plaintiffs—not PNC—paid their attorneys approximately $30 million for their services. Accordingly, the entire $102 million in settlement payments constitutes a refund of fees or charges for Professional Services that class members paid to PNC and National City Bank, and as such, are excluded from coverage pursuant to the Professional Services Charge Exception.”

The implication of the Third Circuit’s decision seems to be that, if the $30 million in attorney’s fees had been structured differently in the settlement, i.e., characterized as a separate obligation of PNC, in addition to the amount that it was obligated to pay for reimbursement of overdraft fees, then such attorney’s fees may have been amounts that PNC was legally obligated to pay and outside the scope of the Professional Services Charge Exception. D’oh!

[If this had been the case, then the insurers may have argued that, if no coverage were owed for reimbursement of overdraft fees, then no coverage should be owed for plaintiff’s attorneys fees incurred to achieve a settlement of such uncovered overdraft fees. But that’s neither here nor there in light of the decision reached.]