Upon receiving the instructions, the buyer's attorney forwarded the hacker's instructions to an ABL employee. The ABL employee responded that she would not be able to transfer the money on that day, but would do so the following Monday morning.

On Monday, June 29, 2015, the hacker (again representing himself to be the seller's attorney) emailed the ABL employee to check the status of the wire transfer. The ABL employee then initiated a wire transfer in the amount of $579,360.48 from ABL's bank account to the Nat Jay Music & Ent LLC account.

The hacker absconded with a large portion of the money.

On August 12, 2015, ABL provided Maxum Indemnity Company, which had issued ABL a professional liability insurance policy, with a formal claim requesting coverage under the policy.

After receiving ABL's request for coverage, Maxum requested certain additional information, which ABL provided on August 17, 2015.

ABL sued Maxum on September 15, 2015, seeking declaratory relief and damages for breach of contract.

Maxum moved to dismiss on the basis that the policy's conversion exclusion barred ABL's claim for coverage under the policy. Maxum argued that either the ABL employee who wired the money had committed conversion or that the hacker had committed conversion.

For its part, ABL argued that its claim for coverage arose not out of conversion but “out of its own employee's negligence in initiating a wire transfer without following standard and prudent procedures” and that its employee could not have converted funds because ABL was authorized to issue money to sellers at the direction of buyers' attorneys, which was the very reason ABL held funds in the first place. Similarly, the ABL contended, with respect to the hacker, it was unclear which (if any) person had the right to immediate possession of property with which the hacker had wrongfully interfered.

The Maxum Policy

The Maxum policy provided:

[Maxum] will pay those sums that an “insured” becomes legally obligated to pay as “damages” because of a “wrongful act” in the rendering or failure to render “professional services” by any “insured” or by any person for whose “wrongful acts” an “insured” is legally responsible for.

The policy also contained an endorsement entitled:

Title Abstractors, Title Insurance Agents, Settlement, Escrow and Closing Agents Additional Exclusions

that stated:

The following additional Exclusions are added to the policy.

This insurance does not apply to nor shall [Maxum] have the duty to defend or indemnify any “claim” or “suit” arising out of or resulting from:

…

3. Any damages arising out of the commingling, conversion, misappropriation or defalcation of funds or other property.

The court denied Maxum's motion to dismiss.

In its decision, the court said that it was not then in a position to conclude whether the policy exclusion for conversion applied. It said that the exclusion's language appeared to require a legal determination that the tort of conversion had occurred or that, at the very least, required a determination that ABL's claim for coverage “arises out of” a conversion by either the ABL employee or the hacker.

The court concluded by stating that because the policy exclusion was dependent on a question of law with underlying questions of fact (i.e., whether the tort of conversion had occurred), it could not be clear from the factual allegations that the conversion exclusion applied to bar coverage in this case.

The case is ABL Title Ins. Agency, LLC v. Maxum Indemnity Co., No.: 15-7534 (CCC-JBC) (D.N.J. June 30, 2016).