Hudson alleged that, between April and July 2016, it was the victim of three separate fraudulent schemes related to loans for the purchase of three automobiles. In each instance, Hudson alleged, a member of Hudson applied for a loan to purchase an automobile using a falsified New York State Department of Motor Vehicles ("DMV") title, which misrepresented the owner/seller of the automobile to be purchased with the loaned funds.

Hudson asserted that it learned of these fraudulent schemes when each of the underlying loans "went into default."

Hudson alleged that it suffered losses of $134,879 as a result of these fraudulent schemes.

On July 22, 2016, Hudson submitted a claim to CUMIS related to the losses it incurred as a result of two of the three fraudulent schemes. It subsequently supplemented the claim once it discovered the third fraudulent scheme.

On October 13, 2016, CUMIS denied Hudson's claim.

Hudson subsequently sued CUMIS, which moved to dismiss.

The Fidelity Bond

The bond provided that CUMIS would:

pay [Hudson] for [its] loss resulting directly from the "forgery" or alteration of an "instrument" 

, defined as:

original: mortgage, "document of title," deed, contract for deed, deed of trust, promissory note, "security agreement," money order, certificate of deposit, "certificated securities," bond coupon, interim receipt for a security, assignment of mortgage, check, draft, share draft, bill of exchange, "withdrawal order," "letter of credit," "acceptance," passbook held as collateral, or "certificate of origin or title." 

The district court first dismissed Hudson's breach of contract claim, holding that Hudson had not plausibly alleged that an original instrument had been altered as part of the automobile loan frauds, as required by the policy, but had admitted only receiving photocopies or electronic versions of the falsified titles, consistent with "[t]he custom and practice in the financial industry."

The district court then refused to dismiss Hudson's negligence claim against CUMIS.

The district court explained that the general rule in New York was that an insurance company and its agents had "no continuing duty to advise, guide or direct a client to obtain additional coverage." It added, however, that "[w]here a special relationship develops between the broker and client . . . the broker may be liable, even in the absence of a specific request, for failing to advise or direct the client to obtain additional coverage."

The district court pointed out that Hudson alleged that Hudson and CUMIS had a "multi-faceted, decades-spanning business relationship" and that "[d]uring this exclusive and extensive relationship, [Hudson] relied on CUMIS to provide [Hudson] with the insurance guidance, risk analysis, and coverage recommendations that [Hudson] need[ed] to be successful in its operations."

Moreover, the district court continued, Hudson also alleged, among other things, that over the course of this relationship, Hudson "engaged in periodic risk assessment meetings with [CUMIS] and utilized CUMIS' exclusive risk management services to avoid . . . emerging and ever-changing risks," including risks associated with the "use of technology, including the alteration . . . and the production of digital/electronic and photographic versions of" documents. Yet, according to Hudson, CUMIS "failed to offer [Hudson] a product to cover losses stemming from" the type of fraud of which it was a victim.

The district court then concluded that, "at this early stage of the case," Hudson had "plausibly alleged that a special relationship" might exist between Hudson and CUMIS sufficient for it to deny CUMIS's motion to dismiss Hudson's negligence claim.

The case is Hudson Heritage Federal Credit Union v. Cumis Ins. Society, Inc., No. 17 CV 2930 (VB) (S.D.N.Y. Jan. 22, 2018). Attorneys involved include: For Hudson Heritage Federal Credit Union, Plaintiff: Mitchell Brian Pollack, LEAD ATTORNEY, Mitchell Pollack & Associates PLLC, Tarrytown, NY; Eileen M. Burger, Mitchell Pollack & Associates, PLLC, Tarrytown, NY. For CUMIS Insurance Society, Inc., doing business as CUNA Mutual Group, Defendant: Justin Nessim Kattan, LEAD ATTORNEY, Dentons US LLP (NY), New York, NY.