Our insured sold a vehicle to a customer who used a credit card. The credit card was later determined to be stolen so the bank reversed the transaction. It is my position that this is exactly what the attached endorsement (CA 25 03 False Pretense Coverage) is meant to cover. The carrier is suggesting that it is not covered because: b.(s) states false pretense coverage does not apply to a loss which, for any reason, a bank or other drawee fails to pay. The proximate cause of this loss is the false pretense. Would you agree with the carrier?
Missouri Subscriber
As you have indicated, the false pretense exclusion applies to a loss which, for any reason, a bank or other drawee fails to pay.
In our opinion, a credit card company is not considered a drawee. According to Merriam-Webster, a drawee is the party on which an order or bill of exchange is drawn, or the party (as a bank) on which a draft is drawn. The credit card company is not drawing on funds deposited with it, unless it's a secured credit card. In that case, it is the same as a bank, there is a pool of the person's money available to pay out against any claims against it.
A credit card is in many ways a loan; the card company advances the money based on the person's creditworthiness. Therefore, a credit card company is not a drawee. It is not drawing against deposited cash, it is extending a loan in anticipation of payment. While it is providing money based on the cardholder's use of the card, the payment will not bounce the way a check bounces when there are insufficient funds. A credit card company can rescind payment only once they have determined something is wrong with the account or the cardholder has not been making payments.
More detailed information is included in our discussion on auto dealers coverage and false pretenses. You might find this information helpful.