A hotel operator defeated an insurer’s motion to dismiss its suit alleging that the insurer wrongfully denied coverage and acted in bad faith by denying the hotel’s $1.9 million claim arising from an employee’s fraudulent scheme diverting commissions to fictitious travel agencies. The court held that the hotel operator had suffered an “insurable loss” and rejected the insurer’s argument that the claim was barred under the policy’s suit limitations provision.

Millennium operates hotels throughout the United States and pays commissions to travel agencies in exchange for customer bookings. A Millennium employee at a New York City location engaged in a fraudulent scheme to divert commission payments from legitimate agencies and to collect commissions on behalf of fictitious agencies. Millennium lost more than $1.9 million due to the employee’s misconduct and, upon discovering the scheme, submitted a claim under its crime protection insurance policy issued by Great American. Great American denied the claim, and Millennium filed suit in Ohio federal district court seeking declaratory relief, stating that the claim was covered and alleging that the insurer breached the policy and acted in bad faith in denying the claim. Great American moved to dismiss.

Great American argued that Millennium did not suffer “loss” under the policy because the majority of the claim was “bookkeeping loss” not insured by the policy. Millennium countered that it suffered loss from a diversion of its funds and that the loss occurred immediately upon disbursement of the commission payments that the employee diverted. The court agreed with Millennium and, applying Ohio law, held that the hotel suffered a direct loss upon actual disbursement of the hotel’s funds caused by the employee’s fraud. Because Millennium adequately alleged that the disbursement of the commissions comprising its insurance claim resulted from a fraudulent scheme, the court found the insurer’s motion “not well-taken.”

Great American also argued that Millennium’s lawsuit was barred because it did not comply with the policy’s suit limitations clause, which prohibits legal action against the insurer unless it is brought within two years of the date the loss is discovered. Millennium stated in its proof of loss that it discovered the loss in June 2017 but filed suit more than two years later in February 2020. Millennium contended, however, that it could not reasonably be expected to file a lawsuit prior to the determination of its claim by Great American while also complying with its duty to cooperate with the insurer’s investigation. The hotel also argued that Great American waived its ability to enforce the limitations provision because the insurer indicated during its investigation that the loss would be covered under the policy. The court again agreed with Millennium and denied the insurer’s motion because Millennium’s allegations sufficiently raised a question as to whether Great American took action suggesting that the claim would be covered, causing Millennium to delay filing suit.

The Millennium suit demonstrates that insurers face high burdens in attempting to dismiss coverage actions at the pleadings stage, where all well-pled facts must be accepted as true and all inferences are to be construed in favor of the policyholder. Here, Millennium’s complaint adequately pled both the existence of an insurable loss and allegations suggesting that the policy’s limitations provision was unenforceable under the circumstances. Although the court recognized that the insurer ultimately may prevail on issues raised in the motion, its attempt to do so through a motion to dismiss was not well taken in light of the allegations of the complaint. Policyholders should draft pleadings carefully, with an eye towards both the legal standards to be applied under the policy’s insuring agreement and the insurer’s likely affirmative defenses, both of which are heavily dependent on state law.