Denial of $8M Claim Leads To Lawsuit Against CUMIS

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USAlliance FCU has filed a lawsuit against CUMIS Insurance Society after the insurer denied a claim seeking reimbursement for an $8-million loss allegedly caused by an employee.

The $530-million credit union is claiming CUMIS breached its contact to cover a loss it says falls under the dishonesty and lack of faithful performance clause of its Indemnity Bond Policy. The suit further seeks recovery for bad faith insurance practices and violation of New York's General Business Law.

"USAlliance spent hundreds of thousands of dollars to purchase indemnity bond policies from CUMIS with the understanding the credit union and its members would be financially protected from employee misconduct," said the credit union's lawyer, Mitchell B. Pollack. "While there is no question this claim falls within the parameters of the policy with clear grounds for recovery, it was denied by CUMIS. We are shocked that CUMIS is denying this straightforward claim. Despite USAlliance's ongoing cooperation and efforts to settle the claim, CUMIS has not been willing to offer a fair and equitable settlement."

Mitchell further added in a statement, "If CUMIS is denying this very straightforward claim, we can't help but question if other credit unions across the country are protected if they are unfortunate enough to experience a similar situation."

Failed Leasing Operation

The credit union said the incident involved occurred in 1998 when a former senior employee allegedly failed to disclose serious operational and financial problems in a leasing company, Prime Time Holdings, LLC, in which the employee also allegedly held a secret stake. USAlliance said it was forced to delay until June of 2002 filing a policy claim due to an FBI investigation that remains active. CUMIS denied the claim in April of this year.

Pollack told The Credit Union Journal a complaint has been filed against the former employee and against Prime Time Holdings, but that no charges have been filed. The FBI has seized numerous records related to the case, but Pollack said the timeframe for the investigation is unknown.

"We are dismayed and disappointed that CUMIS has chosen not to honor its responsibilities under the terms of the coverage, said USAlliance CEO Michael F Ambrose, who added the credit union remains open to "meaningful dialogue and a fair resolution" of the matter.

Syd Lindner, a spokesperson for Madison, Wis.-based CUMIS, said, "We have not been made aware of a lawsuit and we have not been served. We are checking into this matter. We believe we treat our policyholders very fairly and we do not favor one credit union over another. We have a responsibility to all credit unions to do so.

"Our policyholders are treated equally, this is our fiduciary responsibility. What's more, we make every effort to quickly pay bond claims," she continued. "We are owned by our credit unions policyholders and we operate in their best interest. Every decision we make is with credit union success in mind."

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