State v. Fid. & Deposit Co. of Md.
| Decision Date | 03 May 2023 |
| Docket Number | PC-2022-06487 |
| Parties | STATE OF RHODE ISLAND and the RHODE ISLAND DEPARTMENT OF LABOR AND TRAINING, Plaintiffs, v. FIDELITY AND DEPOSIT COMPANY OF MARYLAND, Defendant. |
| Court | Rhode Island Superior Court |
For Plaintiff: John A. Tarantino, Esq.
For Defendant: Michael P. Duffy, Esq.
Before this Court is Defendant Fidelity & Deposit Company of Maryland's (Defendant) Motion to Dismiss Counts I, II III, and V of Plaintiffs State of Rhode Island and Rhode Island Department of Labor and Training's (collectively Plaintiffs) Complaint pursuant to Rule 12(b)(6) of the Superior Court Rules of Civil Procedure for failure to state a claim upon which relief can be granted. (Def.'s Mem. in Supp. of Def.'s Mot. to Dismiss (Def.'s Mem.) 1.) In addition, Defendant also moves to sever and stay Counts IV, VI, VII, and VIII of Plaintiffs' Complaint. Id. Plaintiffs filed a timely objection on February 24, 2023. See Docket. Jurisdiction is pursuant to Rule 12(b)(6). This Decision follows.
Factual Background[1]
Plaintiff State of Rhode Island (the State) is a body politic and the named insured. (Compl. ¶ 1.) Plaintiff Department of Labor and Training (DLT) is a department established within the State's Executive Branch. Id. ¶ 2. DLT is responsible for activities assigned by law, including payment of benefits under the Unemployment and Temporary Disability Insurance Programs. Id. Defendant is an Illinois corporation with its principal place of business in Schaumburg, Illinois. Id. ¶ 3.
For valuable premium, Defendant issued a Government Crime/Crime and Fidelity insurance policy (First Policy Agreement) to the State with a policy period of July 1, 2019 through July 1, 2020. (Compl. ¶ 7; Compl. Ex. 1 (First Policy Agreement) at 6, 9.) The First Policy Agreement also included a limit of insurance per occurrence in the amount of $25 million. (Compl. ¶ 7; First Policy Agreement at 12.) After expiration of the First Policy Agreement, Defendant issued a second insurance policy (Second Policy Agreement) to the State for valuable premium with a policy period from August 1, 2020 through August 1, 2021. (Compl. ¶ 8; Compl. Ex. 2 (Second Policy Agreement) at 6, 9.) The second insurance policy carried a limit of insurance per occurrence in the amount of $15 million. (Compl. ¶ 8; Second Policy Agreement at 12.) Under Section A.3.a of both the first and second policies (collectively, the Policies), insurance coverage included "loss resulting directly from 'forgery' or alteration of checks, drafts, promissory notes, or similar written promises, orders or directions to pay a sum certain in 'money' that are: (1) [m]ade or drawn by or drawn upon you . . ." Additionally, under Section A.7.a of the Policies, coverage included "[l]oss resulting directly from a fraudulent: (a) [e]ntry of 'electronic data' or . . . 'computer system' owned, leased or operated by you, provided the fraudulent entry or fraudulent change causes . . . '(i) [m]oney . . . to be transferred, paid or delivered; or (ii) [y]our account at a 'financial institution' to be debited or deleted." Compl. ¶ 10 (quoting First Policy Agreement at 15; Second Policy Agreement at 15).
DLT administers the Unemployment Insurance Program to provide benefits to persons out of work through no fault of their own. Id. ¶ 12; see also Def.'s Mem. 2. On March 27, 2020, in response to the recent outbreak of the COVID-19 pandemic,[2] the federal government provided additional assistance, passing the Coronavirus, Aid, Relief, and Economic Security Act (CARES Act) to provide funding to states. Id. ¶ 13. The State received CARES Act funds and used those funds to pay Pandemic Unemployment Assistance (PUA), Pandemic Emergency Unemployment Compensation (PEUC), and Federal Pandemic Unemployment Compensation (FPUC) claims. Id. ¶¶ 13-14. Each of these assistance programs provided benefits and relief to individuals who had exhausted their benefits or would not normally receive such benefits. Id. ¶¶ 13-15.
As a part of the application process for these program benefits, applicants submitted their claims through DLT's website, inputting "certain information (social security number, name, address, date of birth, driver's license or state identification number and issuing state, telephone number and employment history) to enter and gain access [to] DLT's UI Claims System." Id. ¶ 18. Applicants had to undergo a similar process to receive DLT's PUA claims as well. Id. ¶ 19. The system required an applicant to complete a weekly certification in order to continue receiving benefits through the programs. Id. ¶ 21.
Around early May 2020, DLT received reports that imposters applied for benefits they were not entitled to receive, and DLT was also informed that certain banking information had been hijacked to bank accounts not associated with actual applicants. Id. ¶ 25. Imposters would submit fraudulent claims for Unemployed Insurance (UI), PUA, PEUC, and/or FPUC into the DLT Claims Systems and directed payments to themselves or other bank accounts using previously stolen "personally identifiable information." Id. ¶ 26. Hijackers also gained unauthorized access to pin numbers by reopening or refiling a claim through the use of the claimant's date of birth and social security number, allowing imposters/hijackers to "hijack" funds to a bank account not associated with the actual applicant. Id. ¶ 28. The fraudulent entry of personal data, as well as the fraudulent instruction to debit the State's account and transfer funds directly, caused losses incurred by the State. Id. ¶¶ 29-30.
After an investigation, "DLT acquired sufficient information about the manner in which the fraud was perpetrated to implement certain processes that enabled DLT to confirm that certain claims were fraudulent" . . . and to "prevent an estimated $3.2 billion in fraudulent unemployment benefits from being paid out over the course of the COVID-19 pandemic." Id. ¶ 35. On March 23, 2021, the State claimed "a loss of employment security benefits payments valued in excess of $25 million due to fraud on diverse dates in 2020 and 2021" and advised Defendant that it engaged in efforts to mitigate its losses. Id. ¶ 38. On February 18, 2022, after compiling a second set of proof of loss, the State submitted a report with losses totaling in excess of $15 million from fraud in 2020 and 2021. See id. ¶ 40.
On June 16, 2022, the State provided Defendant with more requested information regarding the State's losses. Id. ¶ 43. Several weeks later, on July 8, 2022, Defendant denied Plaintiffs' claims. Id. ¶ 44. Plaintiffs filed this lawsuit in Superior Court on November 14, 2022, asserting declaratory judgment on both Policies (Counts I & II), breach of the First Policy (Count III), breach of the implied covenant of good faith and fair dealing with respect to the First Policy (Count IV), breach of the Second Policy (Count V), breach of the implied covenant of good faith and fair dealing with respect to the Second Policy (Count VI), and bad faith refusal to pay claims under First and Second Policies in violation of G.L. 1956 § 9-1-33 (Counts VII & VIII). See Compl.
Motion to Dismiss
On January 10, 2023, Defendant filed its Motion to Dismiss Plaintiffs' Complaint with respect to Counts I, II, III and V for failure to state a claim upon which relief can be granted. See Docket; Def.'s Mem. 1.
In support of its motion, Defendant asserts that there is no provable set of facts under which Plaintiffs would be able to establish that their claims are covered under the Policies. (Def.'s Mem. 4.)
Specifically, Defendant avers that the language contained in the Policies is dispositive as to potential coverage, and the losses resulted from alleged use of "another person's . . . confidential or personal information." Id. at 5 (emphasis added). Furthermore, Defendant maintains that there is no doubt that the fraud resulted from the use of confidential or personal information, which is expressly excluded by the insurance policy. Id. at 6.
As additional support, Defendant contends that the exclusion provision under § D.d.1-2 specifically precludes coverage from loss resulting from use of "confidential or personal" information, which is the exact situation here. Id. at 7 (emphasis added). "[C]overage is precluded if the information used was either confidential or personal." Id. Defendant maintains that the information used in the fraudulent applications was confidential information and it was not in the public domain. Id. In the alternative, if it is not confidential, then Defendant further avers that the information is personal information.[3] Id. at 8. As a final argument Defendant argues that even if the information that was used was not included in the list under § D.d.1-2, the list is not exhaustive and can include other information. The other information (social security number, date of birth, etc.) still fits under the catch-all exclusion, and therefore, Plaintiffs cannot seek recovery of their losses through the Policies. Id. at 8-9.
Plaintiffs object, first asserting that the exclusion in the Policies applies only to unauthorized disclosure or use of confidential information that is "held by the insured." Plaintiffs continue their viewpoint, stating that the exclusion is "first-party coverage covering the insured's property and not coverage for the insured's liability . . ." Id. at 11-12 (quoting Katherine Musbach & Reina Dorvilier ...
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