Hunton Insurance Recovery Blog

Hunton’s insurance coverage team recently secured an important appellate victory for clients St. John’s University and Hofstra University in a coverage dispute arising from United Educators Insurance Company’s (“UE”) categorical refusal to defend or indemnify the universities in student class action lawsuits filed after the universities transitioned to remote instruction during the COVID-19 pandemic.

The decision is significant both for colleges and universities facing pandemic-related tuition refund suits, and for policyholders more broadly. It reaffirms a core principle of insurance law: a liability insurer’s defense duties require a defense even where some of the claims or relief sought in the underlying lawsuit may not be covered. Rather, where the allegations create a reasonable possibility of covered loss, the insurer must defend the entire lawsuit.

Background: Pandemic-Related Student Lawsuits and the Coverage Dispute

During the COVID-19 pandemic, St. John’s University and Hofstra University, like many institutions across the country, closed their campuses and shifted to remote instruction to protect students, faculty, and staff. The Universities were later named as defendants in putative class action lawsuits brought by students who alleged that they had not received the full benefit of the in-person educational experience for which they had paid. The students sought reimbursement of tuition and fees, damages for alleged diminution in the value of their degrees, and other relief.

The Universities tendered the lawsuits to UE, their liability insurer, seeking coverage for defense costs and any resulting liability under the Educators Legal Liability coverage form. UE denied coverage, relying on an exclusion for loss involving “the return of funds.” The insurer argued that this exclusion applied because the student lawsuits sought, among other things, the return of amounts paid for tuition and fees. The Universities, represented by Hunton, filed suit in New York Supreme Court challenging the denial.

The Courts’ Rulings

The Supreme Court held that the word “funds” was broad enough to include tuition and fees, meaning the exclusion could bar indemnity coverage for claims seeking reimbursement of those amounts. But the court also rejected United Educators’ attempt to use that exclusion to eliminate its broader obligation to pay the Universities’ defense costs, since the underlying lawsuits also sought damages based on alleged breaches of contract as well as other forms of monetary relief.

UE appealed. The New York Appellate Division, First Department unanimously affirmed. The appellate court agreed that the plain meaning of “funds” included sums paid by students in the form of tuition and fees, particularly because the policies’ definition of damages separately excluded “the value of tuition or scholarships.”

The Appellate Division also held, however, that the insurer must defend the Universities because the underlying complaints sought more than just the return of funds. The Court emphasized the bedrock insurance law principle that a “defendant’s duty to defend under the terms of these policies is triggered whenever the underlying claims raise the possibility of coverage.” The Court noted that “while the return of funds is a significant portion of the relief requested in the underlying actions, a review of the underlying complaints indicates that the plaintiffs also seek damages beyond solely a return of tuition and fees.” Because the students sought both covered and uncovered relief, the Court held that UE must cover the entire defense of the underlying lawsuits.

Key Takeaways

The decision reinforces that the duty to defend is broader than the duty to indemnify and based on a mere potential for coverage, rather than an actual finding of coverage. The defense obligation arises whenever the underlying allegations suggest a reasonable possibility of coverage. The question is not whether every theory of relief is covered or whether the insurer ultimately will have to indemnify the policyholder; instead, it is whether there is a possibly that the insurer may have to indemnify the policyholder.

Here, the insurer attempted to use a single remedy — reimbursement of tuition and fees — as a basis to bar coverage in totality. But other remedies remained available to the students, including an award of damages for the alleged breaches of contract and the diminished value of the students’ education. Recognizing that distinction, the Appellate Division prevented the insurer from distending an exclusion intended to apply only in limited circumstances into an outright bar against any lawsuit brought by a student based on contractual non-performance. Policyholders need to be vigilant about insurer overreach, particularly when dealing with the insurer’s duty to defend.

The Hofstra & St. John’s decision is the first appellate decision in the country addressing coverage for student lawsuits arising from pandemic-related campus closures. For other colleges and universities facing similar coverage denials, the decision provides a strong basis on which to seek reconsideration by the insurer.

Timing is critical. More than six years have passed since campuses were closed and some universities may be up against their state’s statute of limitations or their policy’s contractual limitations provisions. Universities should therefore take immediate action to preserve their rights where questionable claim denials have been received.