(Article from Insurance Law Alert, September 2024)
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Holding
A Texas district court ruled that an insurance company’s contractual right to seek reimbursement of funds that its policyholder received from other sources was limited to funds that applied to covered occurrences under the applicable crime policy. National Union Fire Ins. Co. of Pittsburgh, PA v. RealPage, Inc., 2024 U.S. Dist. LEXIS 160399 (N.D. Tex. Sept. 5, 2024).
Background
The dispute arose from a phishing attack perpetrated on RealPage in 2018, in which more than $10 million of funds were diverted to hackers’ bank accounts. Approximately $9 million of the stolen funds were owed to RealPage’s clients and $1 million represented transaction fees owed RealPage. RealPage reimbursed its clients the $9 million and then sought coverage from National Union under a commercial crime policy. National Union paid the $1 million in lost transaction fees but denied coverage for the lost client funds, arguing that RealPage neither owned nor leased the funds that were intended for its clients, as required by the policy. As reported in our January 2022 Alert, the Fifth Circuit ruled in National Union’s favor, finding that RealPage never “held” the funds so as to trigger coverage.
Following a government investigation of the crime and a seizure of the stolen funds, RealPage received a $2.9 million payment from the government. Thereafter, National Union sought reimbursement for the $1 million it paid pursuant to an Allocation of Recovery Provision (“ARP”) in the policy. When RealPage refused to pay, National Union sued, alleging breach of contract. RealPage asserted a counterclaim seeking a declaration that it did not owe National Union reimbursement pursuant to the ARP. The court granted RealPage’s motion for summary judgment on the declaratory judgment claim.
Decision
The ARP stated that:
Any recoveries, whether effected before or after any payment under this policy, whether made by us or you, shall be applied net of the expense of such recovery: (a) First, to you in the satisfaction of your covered loss in excess of the amount paid under this policy; (b) Second, to us in satisfaction of amounts paid in settlement of your claim. . . .
National Union argued that the remitted funds constituted “recoveries” subject to the ARP. In contrast, RealPage asserted that the ARP applied only to losses covered by the policy and that because it was unclear whether the remitted funds represented a recovery of the covered transaction fee loss or the uncovered client reimbursement loss, National Union was not entitled to reimbursement under the ARP.
Deeming RealPage’s interpretation more plausible, the court concluded that the ARP applied only to “recoveries of losses that result from occurrences that are covered by the Policy and that the Remitted Funds are not subject to the ARP to the extent that those funds consist of amounts stolen from RealPage’s landlord-clients.”
The court explained that the undefined phrase “any recoveries” should be construed to mean only amounts received in “restoration of a loss that results from an occurrence covered by the Policy,” because to find otherwise would “lead to absurd results that would almost certainly be beyond the contemplation of the parties in drafting the ARP.” Additionally, the court noted that in various other provisions, the policy makes a clear distinction between losses that result from covered occurrences and all other types of losses, reasoning that it followed that the ARP is likewise limited to the parties’ obligations with respect to covered losses.
The court therefore held that to the extent that the remitted funds consist of funds stolen from RealPage’s clients, they reflect uncovered losses and are not subject to recovery by National Union under the ARP.
Comments
The court’s interpretation of the ARP seems to deviate from the plain language of the provision. In fact, the court acknowledged that a literal reading of the provision “could conceivably be read to give National Union a right to recoveries of losses ‘unrelated to the [P]olicy,’” but nonetheless interpreted the provision “in relation to the entire instrument to avoid an interpretation that renders the contract unreasonable, inequitable, and oppressive.”
Similar subrogation disputes between insurers and policyholders may yield different outcomes, particularly in light of specific policy language and governing jurisdictional law as it pertains to contractual and/or equitable subrogation.