Insurer Refuses to Reimburse Legal Fees Based on Improperly Broad Reading of Contract Exclusion

In the recently filed case Trustees of Boston University v. United Educators, case number 2684CV01480, in the Suffolk County Superior Court of the Commonwealth of Massachusetts, Boston University has sued its insurer for refusing to reimburse roughly $1.76 million in legal fees tied to the university’s successful defense against pandemic-era tuition refund lawsuits. During the early months of COVID-19, BU shifted to remote instruction and was later sued by students who argued they deserved partial tuition refunds because online learning provided a diminished educational experience. Although BU ultimately won the cases, including an affirmation from the First Circuit Court of Appeals, the university says its insurer improperly denied coverage under several policy exclusions.

According to the lawsuit, United Educators initially argued that the claims fell under an exclusion involving the return of grants or gifts, then later cited exclusions related to breach of contract and illegal profits. BU contends these interpretations distort the policy language and notes that a New York judge rejected a similar argument by United Educators in a separate lawsuit involving Hofstra University and St. John's University. BU also argues that exclusions for illegal profits cannot apply because the university prevailed in court. After failed mediation efforts in 2023, BU is now asking the court to declare the exclusions inapplicable and require the insurer to cover its defense costs.

In the similar case of SXSW, L.L.C. v. Fed. Ins. Co., No. 22-50933, 2024 LX 252509 (5th Cir. (Tex.) Mar. 21, 2024), Federal likewise denied any obligation to defend or indemnify SXSW for customer reimbursement claims after the music festival was canceled by the city of Austin due to COVID. Despite the inclusion of a “Breach of Contract” cause of action, the Fifth Circuit explained the Contract Exclusion still did not preclude potential coverage. “[T]he question is not whether the contracts were the but-for cause of the Bromley Complaint, but whether the claims in the complaint alleged liability under a contractual obligation. . . . [T]he Bromley Plaintiffs' claims were not limited to breach-of-contract; they also brought claims for unjust enrichment and conversion—two state law causes of action that do not arise from contracts.” Id. at *9. Because this construction proffered by the insured was reasonable, the Fifth Circuit properly concluded its evaluation there, not even considering the insurer’s preferred interpretation. Id. (“We need not consider Federal's understanding of the exclusion because SXSW's reading of it is plainly reasonable.”)