HOFSTRA UNIVERSITY v. UNITED EDUCATORS (2026)

Hunton Andrews Kurth LLP, New York (Michael S. Levine of counsel), for appellants-respondents.

Ansa Assuncao, LLP, White Plains (Steven F. Gooby of counsel), for respondent-appellant.

Order, Supreme Court, New York County (Lyle E. Frank, J.), entered March 7, 2025, which, to the extent appealed from, interpreted the term “funds” in the subject insurance policies to include sums paid by students in the form of tuition and fees for purposes of a policy exclusion, and denied defendant's motion to dismiss the amended complaint, unanimously affirmed, without costs.

In this insurance coverage dispute, exclusions paragraph 15(q) of the policies defendant issued to plaintiffs states that defendant is not liable for any loss “related to or arising out of ․ any demand for the return of funds.”  The court correctly found that the plain meaning of the term “funds” is sufficiently clear on its face to include the sums paid by students in the form of tuition and fees (see Federal Ins. Co. v International Bus. Machs.  Corp., 18 NY3d 642, 650 [2012] ).  Moreover, the definition of damages under the policies explicitly excludes “the value of tuition or scholarships.”

Given that the policies remain enforceable with respect to other covered losses, they are not illusory (see Lend Lease [US] Constr.  LMB Inc. v Zurich Am. Ins. Co., 136 AD3d 52, 60 [1st Dept 2015], affd on other grounds 28 NY3d 675, 685 [2017] [“[A]n insurance policy is not illusory if it provides coverage for some acts;  it is not illusory simply because of a potentially wide exclusion”] [internal quotation marks omitted] ).  Accordingly, the funds exclusion provision of the policies bars claims for reimbursement of tuition and fees.

However, 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.  The underlying class action complaints seek compensatory, punitive, and/or statutory damages;  injunctive relief;  restitution;  and such other relief as the court deems just and proper.  At this stage of the proceedings, dismissal based on the exclusion is premature, as the record does not establish that the only available damages consist of a return of money paid.

Defendant's argument that the damages sought in the underlying class action lawsuits are based on wrongfully acquired funds such that public policy bars plaintiffs' claims is unavailing (see J.P. Morgan Sec. Inc. v. Vigilant Ins. Co., 21 NY3d 324, 335 [2013] ).

The policies are not traditional duty to defend policies.  Rather, they provide for payment of defense costs when those costs and expenses are “incurred.”  Nevertheless, defendant is estopped from arguing that the court improperly applied a duty to defend standard in denying its motion to dismiss (see Matter of Sbuttoni, 16 AD3d 693, 694 [2d Dept 2005] ).¹

Even if we considered the argument, it is without merit.  “A carrier's duty to defend and the duty to advance defense costs are triggered by the same allegations” (Westchester Fire Ins. Co. v. Schorsch, 186 AD3d 132, 147 [1st Dept 2020] ).  “The duty to provide defense costs must be construed broadly in favor of the policyholder, and exists whenever a complaint against the insured alleges claims that maybe covered under the insurer's policy” (id. [internal quotation marks omitted] ).

Applying those principles here, defendant's duty to pay defense costs is triggered whenever underlying claims raise the possibility of coverage.  In other words, the duty to pay defense costs arises in the same circumstances as the duty to defend whenever there is a possibility of coverage (see Fieldston, 16 NY3d at 264).  The class action suits seek

damages beyond tuition and fees that fall under the scope of defendant's duty to pay defense costs.

The Decision and Order of this Court entered herein on June 9, 2026 is hereby recalled and vacated (see M–3947 decided simultaneously herewith).

FOOTNOTES

1.   In defendant's memorandum of law in support of its motion to dismiss, defendant invokes the duty to defend standard, quoting Fieldston Prop. Owners Assn., Inc. v Hermitage Ins. Co., Inc., which holds that the duty arises where the allegations in the complaint give rise to “a reasonable possibility of recovery under the policy” (Fieldston, 16 NY3d 257, 264 [2011] [internal quotation marks omitted] ).  By contrast, in this appeal, defendant argues that it owed no duty to pay defense costs “until and unless it is established that the underlying claims in fact give rise to coverage,” citing authority that is neither controlling nor persuasive.