Background
Hofstra University and affiliated entities were named as defendants in class action lawsuits filed by students seeking return of tuition and fees paid during periods when the university transitioned to remote instruction—claims that arose frequently across higher education during the COVID-19 pandemic. Hofstra looked to its insurer, United Educators, to cover its defense and any liability. United Educators resisted, relying on a policy exclusion in paragraph 15(q) that barred coverage for any loss “related to or arising out of . . . any demand for the return of funds.”
The insurer argued that “funds” plainly included tuition and fees, and that the student class actions triggered the exclusion in full. Hofstra countered that the term was ambiguous and that even if tuition fell within the exclusion, the insurer retained a duty to defend because the underlying suits sought broader relief beyond just a return of money paid. Supreme Court, New York County (Frank, J.) sided substantially with Hofstra: it interpreted “funds” to include tuition but denied the insurer’s motion to dismiss because the underlying complaints sought damages beyond tuition refunds.
The Court’s Holding
The First Department affirmed. The court agreed that “funds” is not ambiguous: its plain meaning encompasses money paid by students in the form of tuition and fees, particularly given that the policies’ own damages definition separately excluded “the value of tuition or scholarships.” The exclusion for demands to return funds therefore bars coverage for claims seeking reimbursement of tuition payments.
But the court also affirmed that dismissal of the complaint was premature. The underlying class actions did not stop at demanding tuition refunds—they also sought compensatory damages, punitive damages, statutory damages, injunctive relief, and restitution on theories not reducible to the return of money paid. Because those categories of relief remained potentially covered and outside the exclusion, the insurer had not shown that its policies were triggered only by excluded conduct. An insurer’s duty to defend is broader than its duty to indemnify; it is triggered whenever underlying claims raise the possibility of coverage. The availability of non-tuition damages in the student lawsuits preserved that possibility. The court also rejected the argument that Hofstra’s claims were barred by public policy as wrongfully acquired funds, relying on the Court of Appeals’ reading of J.P. Morgan Securities Inc. v. Vigilant Insurance Co.
Key Takeaways
- “Funds” in a policy exclusion for demands to “return funds” unambiguously includes student tuition and fees; a university cannot argue that term is unclear when the policy’s damages section itself excludes the value of tuition and scholarships.
- Even where a “return of funds” exclusion validly bars coverage for reimbursement of tuition, the insurer’s duty to defend survives if the underlying complaints seek broader relief—compensatory, punitive, or statutory damages—not solely a return of money paid.
- The duty to defend is triggered by the possibility of coverage, not its certainty; courts evaluate whether any claim in the underlying lawsuit could fall within the policy’s coverage, not just the predominant theory.
Why It Matters
Tuition-refund litigation against colleges and universities continues in the wake of COVID-era enrollment disruptions, and this decision provides clear guidance on how “return of funds” exclusions interact with higher-education insurance programs. For insurers, the decision confirms that such exclusions are enforced against their plain meaning—a broadly worded “return of funds” clause will reach student tuition demands. For universities, the more important takeaway is that the duty to defend remains alive as long as the underlying complaints seek damages beyond a simple refund, which most well-drafted class actions do. Colleges and universities reviewing their insurance programs should confirm that their policies cover the non-restitution damages theories likely to be alleged in education-related class actions, and should not assume that a “return of funds” exclusion eliminates coverage entirely where student claims assert broader injury.