Mark Pestronk
Q: Since it looks like we may be heading into a recession this year, we may expect supplier bankruptcy filings. Based on our pandemic experience, our agency's clients often have questions about how they should proceed to try to get refunds. Believe it or not, some clients have gotten back more than they paid -- sometimes twice as much. In those cases, do they have a legal obligation to repay overpayments or can they keep them to compensate for the stress of having to worry about getting their money back?
A: The answer depends on where the overpayment came from, the sequence of payments and the underlying contract. Sometimes they can keep the windfall, but sometimes it would be fraudulent not to refund it.
Let's start with a simple example: Client A buys a cruise using his credit card. Client A also buys a travel insurance policy that covers supplier bankruptcy and cessation of service. After the cruise line ceases service, client initiates a credit card dispute that results in a chargeback so that the credit card company credits the client with the cruise price. Then the client submits a claim to the travel insurance company, which eventually refunds most or all of the cruise price.
This example is easy: At the time that Client A submitted the insurance claim, he no longer had a loss, so the insurance claim was fraudulent and probably a criminal act. If you find out what happened, you should tell him to refund the insurance proceeds.
What if the insurance payment came first, and then the client initiated the chargeback?
Although I am not an expert in insurance law, it seems to me that the client was not committing fraud when he submitted the insurance claim. Even if the client planned to initiate a chargeback, he didn't really know whether it would succeed.
Further, the travel insurance policies that I have seen do not require the client to reimburse the insurer if the latter does not request reimbursement. For example, a popular travel insurance policy states:
"To the extent the company pays for a loss suffered by an insured, the company may recover from funds received by the insured from a third party. The insured will be made whole before the company begins recovery. The insured must help the company preserve its rights against those responsible for its loss."
So, if the insurer finds that out about the chargeback, it may or may not make claim against the client for a refund, but such a claim would be for breach of contract, not fraud.
Regardless of whether the insurer makes a claim against the client, the client may keep the chargeback credit because the credit card merchant failed to perform the service provided. In my review of standard cardholder agreements, the only issue in chargebacks is whether the merchant performed the contracted service, and third-party reimbursements aren't relevant.
If a credit card or insurance law expert informs me that my analysis is wrong, I will certainly follow up with a correction.