Electronic Fund Transfer Coverage Dispute
March 23, 2015
The insured appealed a judgment in favor of the insurer pertaining to a coverage dispute over the theft of over $188,000 from an escrow account. This case is Metro Brokers, Inc. v. Transportation Ins. Co., No. 14-12969, 2015 WL 925301 (11th Cir. March 5, 2015).
Metro is a real estate brokerage firm conducting business in Georgia. Metro maintained bank accounts with Fidelity Bank and used the bank's online system to make payments from Metro's accounts. In 2011, thieves logged into the bank's online banking system using a Metro employee's access ID and password. Then, using a randomly generated single-transaction security code, the thieves authorized various payments from a Metro client escrow account to several other bank accounts.
Metro filed a claim under its insurance policy with Transportation Insurance Company (TIC). The insurer denied coverage based on the policy's malicious-code and system-penetration exclusions. Metro countered that the coverage existed under the fraud and alteration endorsement. Metro sued for coverage, but the trial court found in favor of the insurer. This appeal followed.
The United States Court of Appeals, Eleventh Circuit, noted Metro's argument that its loss was covered by the fraud and alteration endorsement. The court did not agree with this stance. The court said that the endorsement provides that the insurer will pay for loss resulting directly from forgery or alteration of, on, or in any check, draft, promissory note, bill of exchange, or similar written promise, order, or direction to pay a sum certain; the term “forgery” was defined as the signing of the name of another person or organization with intent to deceive.
In this instance, the court found that the electronic fund transfer did not involve a check, draft, promissory note, or bill of exchange. The transfers also cannot be characterized as involving a written promise, order, or direction to pay. Also, the court said that Metro failed to demonstrate that the theft involved the signing of a name as required by the policy definition of forgery. Therefore, because Metro failed to demonstrate that its loss was covered under the forgery or alteration endorsement, the appeals court agreed with the trial court's ruling.
As for the malicious-code exclusion, the circuit court also agreed with the trial court that the exclusion applied. The court noted that the thieves used a computer virus to commit their theft. The policy defined malicious code as including computer viruses. Although Metro argued that the computer virus did not in fact cause the loss, the policy states unambiguously that it does not cover losses caused directly or indirectly by malicious codes regardless of any other cause or event that contributes concurrently or in any sequence to the loss. Based on this broad exclusionary language, the court concluded that Metro's loss was excluded.
The ruling of the trial court in favor of the insurer was affirmed.
Editor's Note: The Eleventh Circuit Court of Appeals ruled in favor of the insurer, noting that under both federal and state law, electronic fund transfers are distinguished from and treated differently from fund transfers made by check, draft, or bill of exchange. Also, the court in its ruling noted that the policy's provision that signatures that are produced or reproduced electronically will be considered the same as handwritten signatures in and of itself did not establish that an access ID and password constitute a signature within the meaning of the policy.