Cumulus Investors, LLC v. Hiscox, Inc.

Background

Cumulus Investors, LLC brought one breach-of-contract claim against Hiscox, Inc. and Hiscox Insurance Company Inc. The dispute concerned a commercial crime policy that included coverage for losses from employee theft, including theft or forgery committed by an employee. Hiscox denied Cumulus’s claim.

Cumulus alleged that GigaMedia Access Corporation, also doing business as GigaMedia Corporation and GigaTrust, needed money to avoid defaulting on a loan. According to Cumulus, Giga employees Robert Bernardi and Nihat Cardak used falsified financial information and a letter bearing a forged signature to induce Cumulus to lend Giga $4 million. Cumulus alleged that the employees took the money for themselves rather than using it for Giga’s business purposes. Cumulus also alleged that they forged Cumulus’s consent to a merger or reorganization, causing Cumulus’s shares in Giga to become worthless.

Cumulus alleged losses exceeding $17 million and sought insurance coverage. The policy provided coverage for loss of money, securities, or other property sustained by an insured and resulting directly from theft or forgery by an employee. The policy originally identified NJK Holding Corp. as the named insured. An endorsement expanded the definition to include NJK Holding Corp. and its subsidiaries and affiliates owned, managed, or controlled by NJK Holding Corp. or the Kazeminy Family, or for which they had insurance responsibilities.

Hiscox’s Motion

Hiscox moved to dismiss under Federal Rule of Civil Procedure 12(b). It argued under Rule 12(b)(1), which addresses subject-matter jurisdiction, that Cumulus lacked an actual injury sufficient to establish the constitutional requirement known as standing. It also argued under Rule 12(b)(6), which addresses whether a complaint states a legally sufficient claim, that Cumulus had not plausibly alleged coverage under the policy.

Standing

The court rejected Hiscox’s standing argument. Cumulus alleged that it lost $4 million through the loan, that its Giga shares lost value, that its total losses exceeded $17 million, and that Hiscox denied coverage for those losses. The court concluded that these alleged economic losses were a concrete and particular injury, that Cumulus plausibly connected the injury to Hiscox’s denial of coverage, and that damages could remedy the alleged injury.

Policy Interpretation and Coverage

The parties agreed that Minnesota law governed the policy. Under Minnesota law, clear policy terms receive their ordinary meaning, while terms reasonably open to more than one interpretation are construed in favor of coverage.

The court concluded that the policy’s coverage elements were plausibly alleged. First, the alleged $4 million loss involved money, and the alleged loss in value of Cumulus’s Giga shares involved securities under the policy. Second, Cumulus adequately alleged theft and forgery. The alleged forged letter induced the loan, the alleged forged merger consent caused Cumulus’s shares to become worthless, and the alleged falsification and manipulation of information supported the policy’s definition of theft.

Third, the court determined that the policy language concerning named insureds was ambiguous. The policy did not define several important terms, including “Kazeminy Family,” “affiliate,” “owned,” “managed,” and “controlled.” The court held that a reasonable interpretation of the language permitted Cumulus to qualify as an affiliate of NJK Holding Corp. because the entities were alleged to be related through common ownership and substantial control involving members of the Kazeminy family.

The court also concluded that Giga could reasonably be treated as a named insured. Cumulus allegedly owned between 31.26% and 33.99% of Giga’s stock and was Giga’s largest shareholder. The court found that the policy’s use of “owned” and “controlled” did not necessarily require ownership of more than 50 percent, particularly because other policy provisions expressly required a greater-than-50-percent interest when that was intended. Under a reasonable interpretation, Giga’s relationship to Cumulus and the Kazeminy family was enough at the pleading stage.

Because Giga could qualify as an insured, the policy’s provision treating an employee of one insured as an employee of every insured could apply to Bernardi and Cardak. The court therefore concluded that Cumulus had plausibly alleged the policy’s employee-theft coverage elements.

Disposition

The court denied Defendants’ Motion to Dismiss. The ruling allowed Cumulus’s breach-of-contract claim to proceed; it did not award insurance benefits or finally determine that Hiscox must pay the claim.