Fishbowl Solutions, Inc. v. Hanover Insurance Company, The

Background

Fishbowl purchased a technology professional liability policy from Hanover covering July 17, 2019, through July 17, 2020. In November 2019, a fraudster accessed an accountant’s email account and created rules that intercepted communications between Fishbowl and its customers. Posing as the accountant, the fraudster directed customers to send invoice payments to the fraudster. One customer could not recover its payments, which totaled $176,962.00; $29,035.79 was later seized with assistance from the United States Secret Service.

Fishbowl sought coverage for the resulting loss under the policy’s Cyber Business Interruption and Extra Expense coverage. Hanover repeatedly denied coverage. Fishbowl filed a breach-of-contract lawsuit and then moved under Federal Rule of Civil Procedure 15 to amend its complaint to add a claim under Minnesota Statute § 604.18, which addresses an insurer’s bad-faith denial or delay of benefits.

Legal standard

Rule 15 generally directs courts to freely allow amendments when justice requires, but leave may be denied for reasons such as futility. An amendment is futile if the proposed claim would not survive a motion to dismiss under Rule 12(b)(6), which tests whether the pleaded facts plausibly state a claim for relief.

Under Minnesota Statute § 604.18, an insured must show both that the insurer lacked a reasonable basis for denying benefits and that the insurer knew it lacked that basis or acted with reckless disregard of it. An insurer is entitled to debate a claim when coverage is “fairly debatable,” whether the dispute concerns facts or the meaning of the policy.

Court’s analysis

Fishbowl alleged that the fraudster’s conduct impaired its business operations by interfering with Fishbowl’s ability to communicate with customers and receive payments. It also relied on Hanover’s investigation, the delay in handling the claim, multiple coverage denials, and alleged differences between a denial letter and later deposition testimony by Hanover’s Property Claims Director.

The court stated that these allegations could suggest the absence of a reasonable basis for the initial denial, satisfying the first bad-faith requirement for purposes of the analysis. But Fishbowl also had to show the required knowledge or reckless disregard. The court concluded that it could not do so because the parties’ dispute involved an unresolved legal question about whether the policy’s Business Interruption coverage applied to the “man in the middle” loss.

The policy covered actual lost business income and extra expenses resulting from a data breach that caused an actual impairment or denial of business operations. Hanover argued that the loss resulted from invoice manipulation rather than an interruption of Fishbowl’s regular business activities, and that the policy addressed income Fishbowl would have earned, not money already owed but redirected before Fishbowl received it. The court found that these arguments created reasonable disagreement about coverage.

The court emphasized that Fishbowl’s interpretation might ultimately be correct and that Fishbowl might prevail on its breach-of-contract claim. But an insurer’s interpretation does not constitute bad faith merely because a court later determines that interpretation was wrong. Because the coverage question was fairly debatable, the proposed bad-faith claim would not survive a Rule 12(b)(6) motion and was therefore futile.

Disposition

Judge Becky R. Thorson denied Fishbowl Solutions, Inc.’s Motion to Amend the Complaint to Add a Claim Under Minnesota Statute § 604.18. The order did not decide the underlying breach-of-contract coverage dispute.