In Private Bank & Trust Co. v Progressive Cas. Ins. Co., NO. 04-2515, 2005 WL 1274275 (7th Cir. May 27, 2005), the Seventh Circuit Court of Appeals ruled that fraudulent bank withdrawals made via telephone were not covered under a financial institution bond.

 

Robert A. Manola used fake documents to open a corporate account and deposited stolen checks at Private Bank. A few days later, he withdrew over $400,000 from the account by phone. Manola returned to the bank a few weeks later to withdraw the balance of the money in the account and was arrested. The bank, however, was unable to recover the funds he had transferred from his account via telephone.

 

The bank filed a claim with Progressive under a Financial Institution Bond Standard Form No. 24 that contained a provision for on-premises fraud coverage. Progressive denied the claim, and both parties filed cross-motions for summary judgment.

 

The court summarized the main issue of the case as follows: “The precise question here is whether the 'on premises' fraud coverage in a standard financial institution bond covers a loss that results from an off-premises fraudulent withdrawal that is preceded by fraudulent acts committed on the insured bank's premises.”

 

Private Bank argued that its loss resulted directly from Manola's false pretenses while he was “present on the premises.” The fraudulent deposit, the bank contended, was the direct cause of loss, not the withdrawal made by phone.

 

The court, though, said, “We concluded [in a previous decision] that absent a policy irrevocably committing the bank to allowing withdrawals at the moment of deposit, a loss occurs for purposes of the 'on premises' fraud coverage in a financial institution bond only when the person who withdraws the money is physically present on the bank's premises at the time of the withdrawal.”

 

Private Bank asked the court to look at the loss as a single fraudulent scheme and to adopt an interpretation where losses would be covered under the on-premises provision “if the 'principal' fraudulent acts or 'most' of the fraudulent scheme occurs on the bank's premises.”

 

The court refused to interpret the bond's language in such a manner. Manola was not on the bank's premises when he made the telephone withdrawal of funds, and thus, the on-premises provision did not apply to the loss.