Social engineering and electronic impersonation scams have increased in recent years, as have cases involving resulting claims for insurance coverage. Claims typically involve the impersonation of a company executive, employee, or client and a fraudulent electronic communication directing an employee of the policyholder to transfer funds to another account. As outlined in our update of November 8, 2017, courts differ significantly as to whether or not this situation triggers coverage under a standard crime policy or fidelity bond. For example, some courts have held that the scheme does not produce a loss “resulting directly” from the “use of a computer” as required for certain “computer fraud” coverage. E.g., Apache Corp. v. Great Am. Ins. Co., 662 Fed. Appx. 252, 258 (5th Cir. 2016); Incomm Holdings, Inc. v. Great Am. Ins. Co., No. 1:15-cv-2671-WSD, 2017 WL 1021749, at *8-*10 (N.D. Ga. Mar. 16, 2017). Other courts have reached the opposite conclusion and found coverage. E.g., Principle Solutions Grp., LLC v. Ironshore Indem., Inc., No. 1:15-CV-4130-RWS, 2016 WL 4618761, at *2, *5 (N.D. Ga. Aug. 30, 2016).

Two recent decisions examined an important exclusion in the context of these types of claims and offered additional support for policyholders seeking coverage. In Rainforest Chocolate, LLC v. Sentinel Insurance Company, No. 2008-095, 2018 WL 6817065, — A.3d —, 2018 VT 140 (Dec. 28, 2018), the supreme court of Vermont reversed a grant of summary judgment to the insurer, held that the voluntary payments exclusion did not apply, and remanded for consideration of specific coverage grants. In that case, an employee had received an email purportedly from his manager directing an electronic funds transfer to an outside bank account. The policyholder soon discovered the email was fraudulent and submitted an insurance claim for the loss. The district court agreed with the insurer that coverage was barred by the “false pretense” exclusion, which applied to “physical loss or physical damage caused by or resulting from . . . voluntarily parting with any property by you or anyone else to whom you have entrusted the property if induced to do so by any fraudulent scheme, trick, device or false pretense.” Id. at *1. The supreme court reversed, holding that the policyholder did not suffer a “physical loss” as required by the exclusion. Id. at *5. The court recognized that the policy defined “money” to include funds held in deposit accounts, but found that the policy was subject to different reasonable interpretations as to whether the loss of electronic funds constituted a physical loss. The court therefore construed the ambiguous term against the insurer and remanded the case for consideration of whether the claim fell within one of the policy’s coverage grants.

The Rainforest court relied heavily on a similar recent decision from the U.S. District Court in Montana. Ad Adver. Design, Inc. v. Sentinel Ins. Co., No. CV 17-140-BLG-TJC, 2018 WL 4621744, — F.Supp.3d — (D. Mont. Sep. 28, 2018). In that case, the policyholder’s operations manager received four emails purporting to be from the company president that requested electronic payments to an external bank account. The insurer denied coverage for the loss after the fraud was discovered, citing the same “false pretense” exclusion. The district court granted summary judgment to the policyholder after agreeing that the exclusion could be reasonably interpreted not to apply to the loss of electronic funds given the explicit requirement of “physical loss.” Id. at *5. While the insurer could reasonably argue that inability to physically access lost funds constituted physical loss, the policy distinguished between “loss” and “physical loss,” permitting the policyholder to reasonably argue that the exclusion was more limited. Id. at *4. The court also found coverage under both the “Forgery” and “Money and Securities” coverage provisions, but called for additional briefing on whether the four emails and four resulting transfers constituted one occurrence or four separate occurrences. Id. at *6-*7.

The precise language of the exclusion played a critical role in both decisions. The Montana district court suggested that the exclusion would apply in the absence of the “physical loss” language and distinguished three cases applying a different exclusion on that basis. Id. at *5 (citing Schmidt v. Travelers Indem. Co. of Am., 101 F. Supp. 3d 768 (S.D. Ohio 2015); Schweet Linde & Coulson, PLLC v. Travelers Cas. Ins. Co. of Am., 2015 WL 3447242 (W.D. Wash. May 28, 2015); Martin, Shudt, Wallace, Dilorenzo & Johnson v. Travelers Indem. Co. of Conn., 2014 WL 460045 (N.D.N.Y. Feb. 5, 2014)). At the same time, the Sixth Circuit recently found coverage for a similar fraudulent email scheme and declined to apply an exclusion for “loss resulting directly or indirectly from the giving or surrendering of Money, Securities or Other Property in any exchange or purchase, whether or not fraudulent, with any other party.” Am. Tooling Center, Inc. v. Travelers Cas. & Sur. Co. of Am., 895 F.3d 455, 463-64 (6th Cir. 2018). The court held that wire transfers to the impersonator’s account meant there had been no “exchange or purchase” as required by the exclusion. Id. Policyholders should therefore carefully examine the language of any “false pretenses” or “voluntary payments” exclusion when negotiating a crime policy or pursuing coverage following a social engineering or phishing scheme.


Apache Corp. v. Great Am. Ins. Co., 662 Fed. Appx. 252, 258 (5th Cir. 2016)

https://caselaw.findlaw.com/us-5th-circuit/1751539.html

Incomm Holdings, Inc. v. Great Am. Ins. Co., No. 1:15-cv-2671-WSD, 2017 WL 1021749, at *8-*10 (N.D. Ga. Mar. 16, 2017).

https://casetext.com/case/incomm-holdings-inc-v-great-am-ins-co-1

Principle Solutions Grp., LLC v. Ironshore Indem., Inc., No. 1:15-CV-4130-RWS, 2016 WL 4618761, at *2, *5 (N.D. Ga. Aug. 30, 2016).

http://propertyinsurancelawobserver.com/wp-content/uploads/sites/11/2016/09/Principle-Solutions-Group-LLC-v.-Ironshore-Indemnity-Inc.pdf

Rainforest Chocolate, LLC v. Sentinel Insurance Company, No. 2008-095, 2018 WL 6817065, — A.3d —, 2018 VT 140 (Dec. 28, 2018)

https://casetext.com/case/rainforest-chocolate-llc-v-sentinel-ins-co

Ad Adver. Design, Inc. v. Sentinel Ins. Co., No. CV 17-140-BLG-TJC, 2018 WL 4621744, — F.Supp.3d — (D. Mont. Sep. 28, 2018).

https://www.executivesummaryblog.com/files/2018/10/Ad-Advertising-Design-v.-Sentinel-Ins.-Co.pdf

Schmidt v. Travelers Indem. Co. of Am., 101 F. Supp. 3d 768 (S.D. Ohio 2015);

https://casetext.com/case/schmidt-v-travelers-indem-co-of-am

Schweet Linde & Coulson, PLLC v. Travelers Cas. Ins. Co. of Am., 2015 WL 3447242 (W.D. Wash. May 28, 2015)

https://www.casemine.com/judgement/us/5914ec53add7b04934949f8f

Martin, Shudt, Wallace, Dilorenzo & Johnson v. Travelers Indem. Co. of Conn., 2014 WL 460045 (N.D.N.Y. Feb. 5, 2014)).

https://casetext.com/case/martin-shudt-wallace

Am. Tooling Center, Inc. v. Travelers Cas. & Sur. Co. of Am., 895 F.3d 455, 463-64 (6th Cir. 2018).

http://www.opn.ca6.uscourts.gov/opinions.pdf/18a0138p-06.pdf