Zalma on Insurance
Education • Business
Insurance Claims professional presents articles and videos on insurance, insurance Claims and insurance law for insurance Claims adjusters, insurance professionals and insurance lawyers who wish to improve their skills and knowledge. Presented by an internationally recognized expert and author.
Interested? Want to learn more about the community?
July 19, 2022
Fairly Debatable Claim Defeats Bad Faith Amendment

What is a Man in the Middle Attack?

Read the full article at https://www.linkedin.com/pulse/fairly-debatable-claim-defeats-bad-faith-amendment-zalma-esq-cfe and see full video at https://rumble.com/v1cqa7p-fairly-debatable-claim-defeats-bad-faith-amendment.html and at
and at https://zalma.com/blog and https://claimschool.com/?p=122 and more than 4250 posts.

Posted on July 19, 2022 by barryzalma

See full video at https://rumble.com/v1cqa7p-fairly-debatable-claim-defeats-bad-faith-amendment.html and at

After an unknown individual (“fraudster”) gained unauthorized access to Fishobowl’s accountant, Ms. Wendy Williams’ e-mail account. Once inside Ms. Williams’ e-mail account, the fraudster created certain “rules” to redirect certain e-mail communications within the e-mail system. One rule redirected e-mail communications containing certain keywords to an e-mail account that is not associated with Fishbowl. Another rule marked e-mail communications sent from “fedins.com” as having already been “read, ” and automatically stored them in the “RSS Subscriptions” folder. These rules prevented Ms. Williams from noticing certain e-mail communications, including e-mails from Federated Insurance regarding invoice payments.

In Fishbowl Solutions, Inc. v. The Hanover Insurance Company, No. 21-cv-00794 (SRN/BRT), United States District Court, D. Minnesota (May 9, 2022) it became clear that the purpose of the scheme was to trick Fishbowl’s customers into paying invoices to the fraudster without Fishbowl noticing. Pursuant to this scheme, the fraudster directed six of Fishbowl’s customers to change how and where to make their payments. By employing a variety of techniques to conceal the scheme, the fraudster posed as Ms. Williams when communicating by e-mail with Federated Insurance. The fraudster also posed as Federated Insurance when communicating by e-mail with Ms. Williams. As a result of the scheme, Federated Insurance made two payments to the fraudster, totaling $176,962. The fraudster was a classic man in the middle who attacked Fishbowl to the tune of more than $176,962.

Fishbowl discovered the scheme and informed the six customers about the scheme, five of them were able to recall or redirect their payments. However, Federated Insurance was unable to do so. Although the United States Secret Service recovered $29,035.79 of the monies paid by Federated Insurance to the fraudster, Fishbowl suffered a loss of the difference, which totaled $147,926.21.
BACKGROUND

Fishbowl is a software company. It creates and customizes packaged software for its customers using the latest technologies. This software helps customers innovate and access information.
The Policy

Hanover issued a Technology Professional Liability Policy to Fishbowl. The Policy provides “Cyber Business Interruption and Extra Expense” coverage (the “Coverage”), as follows:

“We will pay actual loss of ‘business income’ and additional ‘extra expense’ incurred by you during the ‘period of restoration’ directly resulting from a ‘data breach’ which is first discovered during the ‘policy period’ and which results in an actual impairment or denial of service of ‘business operations’ during the ‘policy period.’”

The term “[b]usiness income” includes net income “that would have been earned or incurred if there had been no impairment or denial of ‘business operations’ due to a covered ‘data breach.’” “Business operations” means Fishbowl’s “usual and regular business activities.” “Data breach” is defined in seven different ways in the Policy.
The Insurance Claim

Hanover received Fishbowl’s insurance claim seeking reimbursement for business interruption and losses due to the fraudster’s conduct. Within a few weeks, Hanover denied the claim.
The Civil Suit

Fishbowl sued, alleging breach of contract and seeking declaratory and monetary relief. During discovery, Fishbowl deposed the claims manager Fishbowl alleged that claims manager testified that, as defined by the Policy, Fishbowl “sustained a data breach” and “had suffered an actual loss of business income.”
Plaintiff’s Motion to Amend

Fishbowl timely moved to amend the Complaint, seeking to add a claim for bad faith. Fishbowl contended that Hanover acted with bad faith by repeatedly ignoring, and by failing to properly investigate, its claim and by failing to cover its loss.
The Order

The magistrate judge denied the motion to amend as futile. In reaching that decision, the court analyzed whether Plaintiff had plausibly plead a claim for bad faith in the Proposed Amended Complaint.

The magistrate judge found that Fishbowl failed to plausibly plead the second prong of the test. The court concluded that it is an unresolved legal question whether the Coverage applied to losses caused by a “man in the middle” cyberattack. Because the law is unresolved, the court found the issue “fairly debatable,” and therefore, cannot serve as a basis for a claim of bad faith.
DISCUSSION

Federal Rules of Civil Procedure provides that “[t]he court should freely give leave [to amend a pleading] when justice so requires.” Fed.R.Civ.P. 15(a)(2). But “[a] district court may appropriately deny leave to amend where there are compelling reasons such as . . . futility of the amendment.”

The Amendment is futile where the proposed amended claim would not withstand a motion to dismiss for failure to state a claim. Although a complaint need not contain detailed factual allegations, it must allege facts with enough specificity to raise a right to relief above the speculative level. Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, are insufficient.
Analysis

The Minnesota Legislature has created a private cause of action to penalize bad faith denial of benefits by insurance providers. Under the statute, a party, after commencing a civil suit, may make a motion to amend the pleadings to claim recovery of taxable costs. The applicable legal basis for establishing a claim under the statute is a two-prong test, which is as follows:

The court may award as taxable costs to an insured . . . if the insured can show:

(1) the absence of a reasonable basis for denying the benefits of the insurance policy; and

(2) that the insurer knew of the lack of a reasonable basis for denying the benefits of the insurance policy or acted in reckless disregard of the lack of a reasonable basis for denying the benefits of the insurance policy.

At this stage of the proceedings, plaintiff needs to plausibly plead facts that demonstrate each prong of the test.

First: the pertinent question is “whether a reasonable insurer under the circumstances would not have denied the insured the benefits of the insurance policy.”

A reasonable insurer would not have denied the benefits when there was a covered data breach. Accordingly, the Court found that Plaintiff has plausibly plead the first prong.

Second: the plaintiff must pass a subjective test, requiring a certain mens rea on the part of the insurer. Specifically, it requires an insured to prove that the insurer knew, or recklessly disregarded or remained indifferent to information that would have allowed it to know, that it lacked an objectively reasonable basis for denying the insured’s claim for benefits.

Even if Plaintiff is correct as to the failures of Hanover’s investigation, a district court will not grant a motion to amend the pleadings to add a bad faith claim where it is “fairly debatable” whether coverage applies.

Even if Plaintiff’s legal interpretation of the Policy might prevail, the fact that the issue is legally debatable precludes a bad faith claim. In the absence of any case law that controls whether a “man in the middle” attack constitutes a data breach on the Policy, the Court finds Hanover’s interpretation reasonable.

The Magistrate Judge’s April 6, 2022 Order was affirmed.
ZALMA OPINION
No alt text provided for this image

Bad faith requires a mens rea or an evil intent. When the law is unclear and the insurer fairly argues an issue that is debatable and where there is no dispositive case law, the issue is fairly debatable and there is no basis for seeking damages for damages due to the tort of bad faith .
Just published

Random Thoughts on Insurance Volume XIV: A Collection of Blog Posts from Zalma on Insurance —

(c) 2022 Barry Zalma & ClaimSchool, Inc.
No alt text provided for this image

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business. He is available at http://www.zalma.com and [email protected].

Subscribe and receive videos limited to subscribers of Excellence in Claims Handling at locals.com https://zalmaoninsurance.locals.com/subscribe.

Subscribe to Excellence in Claims Handling at https://barryzalma.substack.com/welcome.

Write to Mr. Zalma at [email protected]; http://www.zalma.com; http://zalma.com/blog; daily articles are published at https://zalma.substack.com.

Go to the podcast Zalma On Insurance at https://anchor.fm/barry-zalma; Follow Mr. Zalma on Twitter at https://twitter.com/bzalma; Go to Barry Zalma videos at Rumble.com at https://rumble.com/c/c-262921; Go to Barry Zalma on YouTube- https://www.youtube.com/channel/UCysiZklEtxZsSF9DfC0Expg; Go to the Insurance Claims Library – https://zalma.com/blog/insurance-claims-library/

00:10:08
Interested? Want to learn more about the community?
What else you may like…
Videos
Posts
4 hours ago
Zalma’s Insurance Fraud Letter – January 15, 2026

ZIFL Volume 30, Number 2

THE SOURCE FOR THE INSURANCE FRAUD PROFESSIONAL

Post number 5260

Read the full article at https://lnkd.in/gzCr4jkF, see the video at https://lnkd.in/g432fs3q and at https://lnkd.in/gcNuT84h, https://zalma.com/blog, and at https://lnkd.in/gKVa6r9B.

Zalma’s Insurance Fraud Letter (ZIFL) continues its 30th year of publication dedicated to those involved in reducing the effect of insurance fraud. ZIFL is published 24 times a year by ClaimSchool and is written by Barry Zalma. It is provided FREE to anyone who visits the site at http://zalma.com/zalmas-insurance-fraud-letter-2/ This issue contains the following articles about insurance fraud:

Read the full 19 page issue of ZIFL at https://zalma.com/blog/wp-content/uploads/2026/01/ZIFL-01-15-2026.pdf.

The Contents of the January 15, 2026 Issue of ZIFL Includes:

Use of the Examination Under Oath to Defeat Fraud

The insurance Examination Under Oath (“EUO”) is a condition precedent to indemnity under a first party property insurance policy that allows an insurer ...

00:09:20
January 14, 2026
USDC Must Follow the Finding of the Administrator of the ERISA Plan

ERISA Life Policy Requires Active Employment to Order Increase in Benefits

Post 5259

Read the full article at https://lnkd.in/gXJqus8t, see the full video at https://lnkd.in/g7qT3y_y and at https://lnkd.in/gUduPkn4, and at https://zalma.com/blog plus more than 5250 posts.

In Katherine Crow Albert Guidry, Individually And On Behalf Of The Estate Of Jason Paul Guidry v. Metropolitan Life Insurance Company, et al, Civil Action No. 25-18-SDD-RLB, United States District Court, M.D. Louisiana (January 7, 2026) Guidry brought suit to recover life insurance proceeds she alleges were wrongfully withheld following her husband’s death on January 9, 2024.

FACTUAL BACKGROUND

Jason Guidry was employed by Waste Management, which provided life insurance coverage through Metropolitan Life Insurance Company (“MetLife”). Plaintiff contends that after Jason’s death, the defendants (MetLife, Waste Management, and Life Insurance Company of North America (“LINA”)) engaged in conduct intended to confuse and ultimately deny her entitlement to...

00:07:30
January 13, 2026
Mediation in State Court Resolves Action in USDC

Failure to Respond to Motion to Dismiss is Agreement to the Motion
Post 5259

Read the full article at https://lnkd.in/gP52fU5s, see the video at https://lnkd.in/gR8HMUpp and at https://lnkd.in/gh7dNA99, and at https://zalma.com/blog plus more than 5250 posts.

In Mercury Casualty Company v. Haiyan Xu, et al., No. 2:23-CV-2082 JCM (EJY), United States District Court, D. Nevada (January 6, 2026) Plaintiff Mercury Casualty Company (“plaintiff”) moved to dismiss. Defendant Haiyan Xu and Victoria Harbor Investments, LLC (collectively, “defendants”) did not respond.

This case revolves around an insurance coverage dispute when the parties could not be privately resolved, litigation was initiated in the Eighth Judicial District Court of Nevada. Plaintiff subsequently filed for a declaratory judgment in this court.

On or about April 15, 2025, the state court action was dismissed with prejudice pursuant to a stipulation following mediation. Plaintiff states that the state court dismissal renders its ...

00:04:26
December 31, 2025
“Sudden” is the Opposite of “Gradual”

Court Must Follow Judicial Precedent
Post 5252

Read the full article at https://www.linkedin.com/pulse/sudden-opposite-gradual-barry-zalma-esq-cfe-h7qmc, see the video at and at and at https://zalma.com/blog plus more than 5250 posts.

Insurance Policy Interpretation Requires Application of the Judicial Construction Doctrine

In Montrose Chemical Corporation Of California v. The Superior Court Of Los Angeles County, Canadian Universal Insurance Company, Inc., et al., B335073, Court of Appeal, 337 Cal.Rptr.3d 222 (9/30/2025) the Court of Appeal refused to allow extrinsic evidence to interpret the word “sudden” in qualified pollution exclusions (QPEs) as including gradual but unexpected pollution. The court held that, under controlling California appellate precedent, the term “sudden” in these standard-form exclusions unambiguously includes a temporal element (abruptness) and cannot reasonably be construed to mean ...

post photo preview
placeholder
December 29, 2025
Doctor Accused of Insurance Fraud Sues Insurer Who Accused Him

Lack of Jurisdiction Defeats Suit for Defamation

Post 5250

Posted on December 29, 2025 by Barry Zalma

See the video at and at

He Who Represents Himself in a Lawsuit has a Fool for a Client

In Pankaj Merchia v. United Healthcare Services, Inc., Civil Action No. 24-2700 (RC), United States District Court, District of Columbia (December 22, 2025)

FACTUAL BACKGROUND
Parties & Claims:

The plaintiff, Pankaj Merchia, is a physician, scientist, engineer, and entrepreneur, proceeding pro se. Merchia sued United Healthcare Services, Inc., a Minnesota-based medical insurance company, for defamation and related claims. The core allegation is that United Healthcare falsely accused Merchia of healthcare fraud, which led to his indictment and arrest in Massachusetts, causing reputational and business harm in the District of Columbia and nationwide.

Underlying Events:

The alleged defamation occurred when United ...

post photo preview
placeholder
December 15, 2025
Zalma’s Insurance Fraud Letter – December 15, 2025

Zalma’s Insurance Fraud Letter

Read the full article at https://lnkd.in/dG829BF6; see the video at https://lnkd.in/dyCggZMZ and at https://lnkd.in/d6a9QdDd.

ZIFL Volume 29, Issue 24

Subscribe to the e-mail Version of ZIFL, it’s Free! https://visitor.r20.constantcontact.com/manage/optin?v=001Gb86hroKqEYVdo-PWnMUkcitKvwMc3HNWiyrn6jw8ERzpnmgU_oNjTrm1U1YGZ7_ay4AZ7_mCLQBKsXokYWFyD_Xo_zMFYUMovVTCgTAs7liC1eR4LsDBrk2zBNDMBPp7Bq0VeAA-SNvk6xgrgl8dNR0BjCMTm_gE7bAycDEHwRXFAoyVjSABkXPPaG2Jb3SEvkeZXRXPDs%3D

Zalma’s Insurance Fraud Letter (ZIFL) continues its 29th year of publication dedicated to those involved in reducing the effect of insurance fraud. ZIFL is published 24 times a year by ClaimSchool and is written by Barry Zalma. It is provided FREE to anyone who visits the site at http://zalma.com/zalmas-insurance-fraud-letter-2/

Zalma’s Insurance Fraud Letter

Merry Christmas & Happy Hannukah

Read the following Articles from the December 15, 2025 issue:

Read the full 19 page issue of ZIFL at ...

See More
Available on mobile and TV devices
google store google store app store app store
google store google store app tv store app tv store amazon store amazon store roku store roku store
Powered by Locals