State in legal fight with insurer over $40M fraud payout 

Corrected at 10:57 a.m. on May 11

THE STATE IS SUING Fidelity & Deposit Co. of Maryland for failure to pay out on policies protecting against fraudulent unemployment claims./ PBN FILE PHOTO

PROVIDENCE The state is in a legal battle with an insurer over efforts to recoup $40 million lost in fraudulent unemployment claims during the pandemic.  

The insurer, Fidelity & Deposit Co. of Maryland, insists it doesn’t owe the state anything. The Illinois-based company says the state’s losses are not covered under its policy because the fraud was initiated through stolen third-party information. Fidelity & Deposit is a subsidiary of the Swiss insurance company Zurich Insurance Group.  

In March 2020, in response to the outbreak of the COVID-19 pandemic, the federal government provided additional funding to all states as part of the Coronavirus, Aid, Relief, and Economic Security Act to supplement unemployment benefits that had been exhausted and to provide benefits to individuals who would have otherwise not qualified.  

According to court filings, the state and the R.I. Department of Labor and Training took out two “Government Crime” policies, the first which ran from July 1, 2019 to July 1, 2020, with a maximum payout “per occurrence” of $25 million. A second policy active from Aug. 1 2020 through Aug. 1, 2021 maxed out at $15 million.  

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On July 8, 2022, the company denied Rhode Island’s total claims of $40 million, asserting “there is no provable set of facts under which [the state] would be able to establish that their claims are covered under the policies” because the losses resulted from alleged use of “another person’s . . . confidential or personal information. … which is “expressly excluded by the insurance policy.” 

The state filed suit in Superior Court on Nov. 22. 

DLT spokesperson Edwine Paul told Providence Business News the state maintained crime insurance from 2004 to 2021. The cost for the latest policies with Fidelity & Deposit were $91,060 and $71,786 respectively and are no longer active. In total, according to the latest DLT report, the state has lost $120 million to unemployment fraud. 

“We are seeking the maximum of the policy limits, which would only account for a portion of the losses,” said Paul. 

In a May 3 opinion written by Superior Court Judge Brian P. Stern deciding on a Fidelity & Deposit motion to throw out the lawsuit, the court declined to rule on the merits of the exclusion provision. But it did find the terms of the policy “ambiguous” and “reasonably susceptible of different constructions,” setting the stage for discovery proceedings and a possible trial if the matter in not settled out of court. 

Asked why the R.I. Office of the Attorney General was not representing the state, Paul said that DLT “sought guidance” from Attorney General Peter F. Neronha’s office “and was advised to seek outside counsel that specializes in insurance litigation.” 

The attorney for the state, John Tarantino of Adler Pollock & Sheehan, did not immediately respond to requests for comment, nor did the attorney on record for Fidelity & Deposit, Michael P. Duffy of Boston-based Tymann, Davis & Duffy LLP.

A spokesperson for Zurich North America, Robyn Ziegler, declined to comment.  

Zurich officials have, however, alluded in public statements to the financial risk of insuring against the kinds of fraud at the center of the case. In December, Mario Greco, chief executive at Zurich, told the Financial Times that cyber attacks may soon become “uninsurable.” 

Roger Williams University law professor Michael J. Yelnosky told PBN that because the May 3 decision ruled against Fidelity & Deposit, “the settlement value of the case just went up.” 

Now, said Yelnosky, “this insurance company knows it is going to have to spend a bunch of money to try and win this case.

“What the court said [to the insurance company] is that ‘you might win, but you don’t win now,’” he said. “There is still a question about what this language means. This case is still at its earliest point. And the court feels there is still work to be done.”  

Asked why the case was filed in state court rather than federal, Paul said that decision was at the discretion of the state’s legal counsel. 

As a matter of legal strategy, Yelnosky said that state courts are generally more favorable to plaintiffs seeking monetary damages from large corporations, which could play to the state’s favor. 

“[Fidelity & Deposit is] playing an away game against the home team,” he said. “This is not an ideal place to have this language interpreted.”  

Most civil cases are settled out of court, said Yelnosky, but without a settlement this case will likely end in an “all or nothing” conclusion.  

“Either these losses are excluded, or they are not. If it’s not covered, they don’t want to have to pay for it,” he said. “This exclusion means something. The question is what does it mean?”  

DLT declined to comment on the case, citing the pending litigation. No additional hearings have been scheduled as of Tuesday, according to online court records. 

(CORRECTION: SUBS 16th paragraph to correct court told insurance company)

Christopher Allen is a PBN staff writer. You may contact him at

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