As previously reported here, (Nov. 8, 2017), companies falling victim to electronic impersonation (“spoofing”) schemes have frequently turned to “computer fraud” coverage found in typical crime policies. In this type of fraud, someone impersonates a vendor, contract partner, or company executive via email or other electronic means, and directs the transfer of funds to an account connected to the fraudster. Courts adjudicating insurance coverage actions arising out of these schemes have reached quite disparate results, with some decisions affirming coverage and some finding no coverage because the loss does not “result directly” from the “use of a computer” or because certain exclusions apply. Since our last update, several more decisions have been issued with potential implications for policyholders pursuing coverage or renewing crime policies. These recent decisions have generally affirmed that spoofing schemes fall within standard computer fraud coverage, though courts have also been willing to apply targeted exclusions for data entry or fraudulent transfers in policies that have them. Purchasers should therefore pay particular attention to any such exclusions in their policies.
A district court in New Jersey recently held that an insured stated a claim for relief under the policy’s “computer fraud” coverage after someone had impersonated a Thailand-based vendor through substitution of email domain names and had directed payment to an account operated by the imposter. Childrens Place, Inc. v. Great Am. Ins. Co., No. 18-11963 (ES) (JAD) (D.N.J. Apr. 25, 2019). The fraudsters also accessed and altered an electronic “vendor setup form” so that it provided false payment instructions. The insurer argued that the imposters did not have “direct access” to the computer system, as required under the insuring agreement, and that the fraud did not “directly cause” the transfer of money from the insured’s account to an account outside its control because of the independent acts undertaken by employees. But the court was persuaded that the complaint alleged sufficient facts to constitute both direct access by the impersonators and a direct causal link to the transfer.
The Second Circuit similarly affirmed coverage under a computer fraud provision, which applied to the “fraudulent . . . entry of Data into . . . or change to Data elements or program logic of . . . a Computer System.” Medidata Solutions Inc. v. Fed. Ins. Co., 729 Fed. Appx. 117 (2018). The insured argued that someone had fraudulently entered data into Medidata’s computer system by using code to cause an email address to appear as that of the company’s president, along with the company president’s photo. The court held that the “unambiguous language of the policy covers the losses” because the imposters “crafted a computer-based attack” that created messages that appeared to be from high-ranking company officials. The attack met the policy criteria because the email’s appearance was “altered by the spoofing code to misleadingly indicate the sender.” The court also applied New York’s proximate cause standard and held that the insured had suffered a direct loss, noting that any independent acts taken by employees to effectuate the transfer were not “sufficient to sever the causal relationship between the spoofing attack and the losses incurred.”
Similarly, the Sixth Circuit found coverage for a manufacturer who fell victim to an imposter posing as a vendor. Am. Tooling Ctr., Inc. v. Travelers Cas. & Surety Co., 895 F.3d 455 (6th Cir. 2018). The fraudster directed payment to be made to a different bank account through a series of emails to the company’s vice president. The court agreed with the insured that the payments constituted “direct loss” because the policyholder “immediately lost its money” when it transferred the funds, and “there was no intervening event.” Moreover, the loss satisfied the “use of a computer” component of the “computer fraud” provision because the imposters “sent [the insured] fraudulent emails using a computer and these emails fraudulently caused [the insured] to transfer the money.”
While the reasoning in these three decisions should prove helpful for policyholders seeking coverage for spoofing schemes, two other recent decisions have denied coverage based on exclusions for fraudulent transfers or data entry. A Washington district court upheld an insurer’s denial of “computer fraud” coverage after an accounts payable clerk altered the instructions for payment to a general contractor in response to a fraudulent external email. Tidewater Holdings, Inc. v. Westchester Fire Ins. Co., No. C18-6006 BHS (W.D. Wash. May 31, 2019). Although the court concluded that the scheme fell within the coverage grant, the court also found that an exclusion for “loss resulting from any Fraudulent Transfer Request” applied to the claim. The policy defined “Fraudulent Transfer Request” as “the intentional misleading of an Employee, through a misrepresentation of a material fact which is relied upon by an Employee, sent via an email, text, instant message, social media related communication, or any other electronic . . . instruction.” The court rejected the insured’s argument that application of the exclusion was ambiguous as applied to different coverage sections. Furthermore, unlike the exclusions discussed in the blog update of January 8 of this year, the exclusion at issue here was not limited to “physical” loss.
Addressing another case filed in Washington district court, the Ninth Circuit upheld the denial of coverage for a fraudulent scheme that caused company employees to alter wiring instructions and to send four payments to a fraudster’s account. Aqua Star (USA) Corp. v. Travelers Cas. & Surety Co. of America, 719 Fed. Appx. 701 (9th Cir. 2018). Although the court assumed without deciding that the policy generally covered that type of “computer fraud,” the court focused on an exclusion for “loss or damages resulting directly or indirectly from the input of Electronic Data by a natural person having the authority to enter the Insured’s Computer System.” The court noted that the employees plainly had authority to access the system and had entered the data causing the loss.
Overall, these recent cases provide strong support for placement of spoofing and similar schemes within the general parameters of computer fraud coverage. At the same time, coverage for this type of loss under any particular crime policy will depend upon the existence and precise wording of any exclusions for fraudulent transfers or data entry. As ever, purchasers of crime policies should scrutinize the potential scope of any such exclusion.