entered into an agreement. Compl. at ¶ 14. K-C was to
provide certain processing, servicing, marketing, and consulting services
to Regent's IPF business division. Id. This division loaned money to
drivers — primarily high risk drivers — to enable them to pay
for their auto insurance policies. Id. at ¶ 7. Regent paid the auto
insurer directly for the term of the borrower-driver's policy. Id. Over
time the borrower-driver paid Regent both the sum it had paid to the
insurer and interest on that sum. Id. Regent required these
borrower-drivers to pay significant down-payments as collateral for their
loans, and in the event that a borrower-driver defaulted on the loan,
Regent would cancel the borrower-driver's policy and recover losses by
seeking a refund of the unused portion of the borrower-driver's premium
and by laying claim to the borrower-driver's down-payment. Id. The IPF
business division's profitability depended on its ability to track
payments, generate timely cancellation notices, and receive refunds on the
unused portions of defaulters' auto insurance policies. Id. at ¶
Under the Regent — K-C agreement, K-C was to establish and
maintain a computer system that would generate the data and reports
needed by Regent in these key tasks. Id. at ¶ 15. K-C was also to
enter account information into the computer and transmit the data to
Regent's pre-existing computers. Id. at ¶¶ 18, 21, 23. Regent
acquired an ownership interest in this computer system. Id. at ¶
16. K-C, as recompense for its services, was to receive a
transaction-based servicing fee and a separate fee equal to 50% of
profits. Id. at ¶ 20.
Regent alleges that K-C, by representing that the IPF business was
profitable, concealed the true state of the IPF business from Regent and
induced Regent to continue its IPF business. Id. at ¶ 22. In
particular, K-C used the computer system it had devised to transmit
incomplete, inaccurate, and misleading data to Regent. Id. at ¶ 23.
The data prevented Regent from properly tracking and addressing
delinquencies and prevented Regent from properly tracking profits and
losses on individual transactions. Id. at ¶¶ 27, 28. As a result of
the inaccurate data, Regent allegedly incurred $3,919,430.00 in
collateral deterioration and overpaid K-C $889,089.00 based on
non-existent profits. Id. at ¶ 37(c).
On or around October 7, 1997, Regent submitted a Proof of Loss
statement to Progressive and sought coverage under the bond. Id. at
¶ 38. On June 18, 1999, Progressive denied coverage and declined to
make payment on the bond. Id. at ¶ 39. On July 12, 2000, following
substantial discussion between the parties, Progressive reaffirmed its
denial and declination. Id. Hudson, Regent's successor by merger,
initiated suit against Progressive.
Hudson alleges two separate causes of action: liability under the
Computer Systems Rider to the bond or, in the alternative, liability
under the Fidelity Insuring Agreement of the bond. Compl. at 12, 14.
Progressive seeks dismissal of the complaint in its entirety. Def. Mem.
at 5, 7, 9. With respect to both causes of action, Progressive argues
that the facts alleged in Hudson's complaint do not establish the
elements that trigger Progressive's obligation to make bond payments.
First, Progressive claims that the exclusion provision of the bond
excludes application of the Computer Systems Rider to the facts presented
by Hudson. Def. Mem. at 5. Hudson does not dispute that the exclusion
applies to the rider. Moreover, the language of the bond itself does not
limit the reach of the exclusion to only the
body of the bond, and the
language of the rider does not modify or abrogate the exclusion. Cf.
Rorer Group, Inc. v. INA, 655 A.2d 123, 125 (Pa.Super.Ct. 1995) (finding
that exclusions apply unless endorsement specifically modifies or
abrogates them). Accordingly, the court reads the exclusion to apply to
The relevant exclusion provision of the bond excludes coverage
loss resulting directly or indirectly from the
complete or partial nonpayment of, or default upon,
any Loan or transaction involving the Insured as a
lender or borrower, or extension of credit, including
the purchase, discounting or other acquisition of
false or genuine accounts, invoices, notes, agreements
or Evidences of Debt, where such Loan, transaction or
extension was procured in good faith or through
trick, artifice, fraud or false pretenses, except when
covered under Insuring Agreement (A), (D), or (E).
Compl., Ex. A (Financial Institution Bond) at § 2(e) (emphasis
added). Progressive argues that Regent's losses as described in the
complaint stem directly or indirectly from nonpayment of or default on
Regent's IPF loans. Def. Mem. at 6. Hudson, on the other hand, argues
that Regent's losses as described in the complaint stem from K-C's
electronic concealment of accounting data. Pl. Mem. at 8. Moreover,
Hudson points out that based on the mechanics of the IPF business, Regent
would not have suffered default losses had K-C not concealed data. Id.
Here the complaint, when read in the light most favorable to Hudson,
shows that Hudson is not claiming that the defaults caused Regent's
losses. Rather, Hudson alleges that because K-C concealed data, Regent
could not timely cancel defaulters' insurance polices, seek refunds on
the unused portions of the premiums, and consequently suffered losses.
Hence, but for the concealment, Regent would not have suffered losses,
and accordingly the concealment, not the default itself, caused the
loss. The exclusion, therefore, does not warrant dismissal in view of
Second, Progressive argues that the Computer System Rider, even if not
excluded, does not afford coverage under the circumstances presented in
the complaint. Def. Mem. at 7. The rider specifically insured Regent for
losses resulting from a "fraudulent. . . change of Electronic Data or
Computer program with any Computer System operated by the Insured,
whether owned or leased. . . ." Compl., Ex. A, Computer Systems Rider at
¶ 1 (emphasis added). Progressive argues that the computer system at
issue was used, owned, and operated by K-C. Def. Mem. at 8-9. However,
the complaint alleges that Regent acquired an ownership interest in the
IPF computer system, that the computer system was designed by K-C to aid
Regent's IPF business, that the computer system was operated by K-C on
Regent's behalf, and that the information in the system was transmitted
directly to Regent's computer system. Compl. ¶¶ 16, 18, 21. These
allegations when understood in the light most favorable to Hudson are
sufficient — although perhaps just barely — to justify the
inference that the computer system was operated by the insured.
Third, Progressive seeks dismissal of Hudson's claim under the Fidelity
Insuring Agreement. Under this provision of the agreement, Progressive
indemnifies Regent for "[l]oss resulting directly from dishonest or
fraudlent acts committed by an Employee acting alone or in collusion with
others. . . ." Compl., Ex. A, Insuring Agreement (A). Progressive argues
that K-C is not Regent's employee, and that therefore, K-C's allegedly
cannot trigger liability under the insuring
agreement. Def. Mem. at 9. However, the insuring agreement defines
"employee" to include "each natural person, partnership or corporation
authorized to perform services as data processor of checks or other
accounting records of the Insureds (not including preparation or
modification of computer software or programs). . . ." By its language,
the definition does not exclude those data processors who both process
data and prepare or modify computer software or programs. The complaint
alleges that K-C, in addition to preparing or modifying computer software
or programs, entered accounting data into the K-C developed computer
system, transmitted the accounting data to Regent's computers, and was an
"employee" of Regent, as that term is defined in the bond. Compl. ¶¶
15, 18, 21, 53. These allegations, read in the light most favorable to
Hudson, are sufficient to survive a motion to dismiss. Accordingly, the
court will not dismiss the second count of Hudson's complaint.
Progressive contends that loan defaults caused Regent's losses, that
Regent did not operate the IFP computer system, and that K-C is not an
"employee" under the terms of the Fidelity Insuring Agreement.
Progressive's motion for dismissal depends on Progressive's establishing
each of these contentions. The complaint, when read in the light most
favorable to Hudson, does not support any of the contentions.
Accordingly, Progressive's motion for 12(b)(6) dismissal of Hudson's
complaint will be denied.
And now, this day of May, 2001, upon consideration of the complaint
(Doc. 1), the defendant's motion for dismissal and supporting memorandum
(Doc. 4), the plaintiff's response (Doc. 7), and the defendant's reply
(Doc. 8), it is hereby ORDERED that the plaintiff's motion for 12(b)(6)
dismissal of the complaint is DENIED.
© 1992-2003 VersusLaw Inc.