Key Points

  • The Appellate Division, First Department, unanimously affirmed a trial court order that read the term "funds" in United Educators' policy exclusion 15(q) to include tuition and fees paid by students, and that denied the insurer's motion to dismiss Hofstra's coverage suit.
  • The funds exclusion bars Hofstra's claims for reimbursement of tuition and fees, and the policies are not illusory because they remain enforceable for other covered losses.
  • Dismissal was premature because the underlying student class actions also seek compensatory, punitive and/or statutory damages, injunctive relief and restitution.
  • United Educators was estopped from arguing that the trial court wrongly applied a duty-to-defend standard, and in any event its duty to pay defense costs is triggered whenever the underlying claims raise the possibility of coverage.
  • The court recalled and vacated its own June 9, 2026, decision in the case.

A New York appeals court ruled Thursday that Hofstra University's insurer, United Educators, cannot walk away from paying the school's costs of defending student class actions, even though the court agreed that the insurer's policies bar coverage for refunds of the tuition and fees at the center of those suits.

A five-justice panel of the Appellate Division, First Department, unanimously affirmed a March 7, 2025, order by Justice Lyle E. Frank of Supreme Court, New York County. Justice Frank had read the policies' exclusion for demands to return "funds" to reach tuition and fees, but had refused to dismiss Hofstra's coverage suit. Both sides appealed, and both lost.

The unsigned decision, from Justices Moulton, who presided, Friedman, Pitt-Burke, Rosado and Michael, means the refund exclusion does not, at this stage, free the insurer from paying defense costs, because the students' suits seek more than refunds. The panel held that United Educators' duty to pay defense costs "is triggered whenever underlying claims raise the possibility of coverage," even though its policies reimburse those costs rather than oblige it to mount a defense itself. The court also recalled and vacated its own June 9, 2026, decision in the case. The new ruling does not describe the earlier one or say why it was withdrawn, noting only a motion, M-3947, decided the same day.

The fight turns on exclusion paragraph 15(q) of the policies United Educators issued to Hofstra, which states that the insurer is not liable for any loss "related to or arising out of . . . any demand for the return of funds." The panel agreed with Justice Frank 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." It cited a 2012 decision, Federal Insurance Co. v. International Business Machines Corp., and it added that the policies' definition of damages explicitly excludes "the value of tuition or scholarships."

The panel rejected the contention that so broad an exclusion made the coverage illusory. Because the policies "remain enforceable with respect to other covered losses," the court held, they are not illusory. It cited its 2015 decision in Lend Lease (US) Construction LMB Inc. v. Zurich American Insurance Co., together with the later affirmance of that decision on other grounds, for the principle that a policy "is not illusory simply because of a potentially wide exclusion." The panel concluded that the exclusion "bars claims for reimbursement of tuition and fees."

That conclusion did not end Hofstra's case. The court wrote that "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 students' complaints, the panel noted, seek compensatory, punitive and/or statutory damages, along with injunctive relief and restitution.

"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," the panel wrote.

United Educators had also argued that public policy barred Hofstra's claims because the damages the students sought were based on wrongfully acquired funds. The panel called that argument "unavailing," citing a 2013 decision, J.P. Morgan Securities Inc. v. Vigilant Insurance Co.

The insurer's remaining argument concerned the standard that governs its duty to pay Hofstra's defense costs. The panel acknowledged that "The policies are not traditional duty to defend policies," and that they instead pay defense costs when those costs are "incurred." A duty to defend, under a 2011 decision, Fieldston Property Owners Association Inc. v. Hermitage Insurance Co., arises where a complaint's allegations give rise to "a reasonable possibility of recovery under the policy."

United Educators contended on appeal that Justice Frank wrongly applied that duty-to-defend standard. The panel held the insurer estopped, or barred, from making the argument, because it had invoked the same standard in the trial court. In a footnote, the court said the insurer's motion papers below had quoted Fieldston, while on appeal it argued that it owed nothing "until and unless it is established that the underlying claims in fact give rise to coverage," relying on "authority that is neither controlling nor persuasive."

"Even if we considered the argument, it is without merit," the panel wrote. It quoted its 2020 decision in Westchester Fire Insurance Co. v. Schorsch: "A carrier's duty to defend and the duty to advance defense costs are triggered by the same allegations." The same decision, the court noted, held that the duty to provide defense costs "must be construed broadly in favor of the policyholder."

Applying that rule, the panel held that "the duty to pay defense costs arises in the same circumstances as the duty to defend whenever there is a possibility of coverage." Because the student suits seek more than refunds, it concluded, they "seek damages beyond tuition and fees that fall under the scope of defendant's duty to pay defense costs."

Hofstra and its co-plaintiffs were represented by Michael S. Levine of Hunton Andrews Kurth LLP. United Educators was represented by Steven F. Gooby of Ansa Assuncao, LLP.

The affirmance, issued without costs to either side, leaves in place the denial of United Educators' motion to dismiss Hofstra's amended complaint. The decision, entered Oct. 29, is marked as uncorrected and subject to revision before publication in the Official Reports.