Third-Party Wire Fraud Triggers Conversion Exclusion Under Professional Liability Policy, Despite No Direct Insured Involvement in Theft of Funds

Applying New Jersey law, the United States District Court for the District of New Jersey has held that a conversion exclusion bars coverage under a professional liability policy for multiple claims against an insured title company following a third-party wire fraud that left the title company with insufficient funds to make necessary customer payments in connection with real estate closings. ABL Title Ins. Agency v. Maxum Indem. Co., 2022 WL 986271 (D.N.J. Mar. 31, 2022).  

The insured, a title agency, maintained an escrow account that held customer funds intended for use in real estate closing transactions.  The insured served as a closing agent for a real estate transaction. At the closing, the insurer issued a check to the seller from the insured’s escrow account in the amount of $579,360.48. Later that day, a third-party fraudster, impersonating the seller’s attorney, sent an email to the buyer’s attorney requesting a wire payment in lieu of the check. The buyer’s attorney received wire instructions from the fraudster, which the attorney then forwarded to the insured. Per the new instructions, the insured wired $579,360.48 from the insured’s escrow account to the fraudster, who misappropriated the funds. Due to the fraud, the insured paid the sale amount twice, leaving its escrow account with a deficit of $579,360.48. Subsequently, multiple escrow account checks bounced due to insufficient funds, leading aggrieved customers to pursue claims against the insured. 

The insured sought coverage under a professional liability policy. In subsequent coverage litigation, the insurer moved for summary judgment, arguing that the policy did not afford coverage for the insufficient fund claims because the claims arose out of the wire fraud and, therefore, were excluded under the policy’s exclusion for “[a]ny damages arising out of the commingling, conversion, misappropriation or defalcation of funds or other property.” The insured argued that the exclusion applied only if an insured was directly involved in the conversion or that, at best, the exclusion was ambiguous and should be interpreted in favor of coverage.

The court disagreed with the insured and granted summary judgment in favor of the insurer. In making this determination, the court held that the exclusion was not ambiguous and applied to any claims arising out of conversion, regardless whether the conversion was perpetrated by the insured. The court distinguished the conversion exclusion from other exclusions in the policy that specifically exclude coverage for specified acts “by any ‘insured.’” In addition, the court acknowledged the broad interpretation of “arising out of” in the exclusion’s lead-in language, confirmed that wire fraud constitutes “conversion” under New Jersey law, and determined that the insufficient fund claims all originated from, grew out of, and had a substantial nexus to the fraudster’s conversion.