Banking institutions pay substantial premiums to insurance companies for professional liability insurance policies, including coverage modeled after directors and officers (D&O) and errors and omissions (E&O) liability policies. The insurance companies have no problem collecting these premiums, but all too often, they balk when it comes time to indemnify their bank policyholders for the settlement of underlying claims against the bank. The insurance companies' failure to pay appears to be happening in connection with the recent settlements by major retail banks involved in the overdraft fee litigation.
Over the past few years, lawsuits have been filed against nearly every significant retail bank over the way that banks calculate and assess overdraft fees. In most of these cases, the customer agreements permitted the banks' method for calculating the fees, the fees and methods were disclosed to the banks' customers, and most importantly, the fee calculation approach was approved by government regulators. Nevertheless, many of the banks have decided to settle these lawsuits for cents on the dollar in order to eliminate the cost of defending against them and to obtain certainty regarding the outcome.