Monetary Loss from Fraudulent Email Scheme Triggers Coverage Under Business Owners’ Policy

A Montana federal district court has ruled that a false pretense exclusion did not preclude coverage under a crime policy for monetary losses resulting from a fraudulent email scheme, reasoning that the exclusion was ambiguous.  Ad Advert. Design, Inc. v. Sentinel Ins. Co., 2018 WL 4621744 (D. Mont. Sept. 26, 2018).  The court also held that further briefing was necessary to determine the amount recoverable under the policy.

In 2016, the insured advertising company fell victim to a fraudulent email scheme.  Over a three-week period, the insured’s operations manager received a series of emails from someone purporting to be the president of the company.  Each email requested that the manager initiate a separate wire transaction.  Believing that the emails were legitimate, the manager submitted written requests to the company’s bank to transfer the money to the designated bank account.  The employee transferred approximately $115,000 in total.  After the company determined that the emails were fraudulent and that it would not be able to claw back the lost funds, it sought coverage under its business owners’ policy.  The insurer declined coverage based on the policy’s “False Pretense” exclusion.

In the litigation that followed, the court ruled that the false pretense exclusion was ambiguous and therefore did not apply.  The exclusion barred coverage for “physical loss or physical damage caused by or resulting from . . . [v]oluntary parting with any property by [the company] if induced to do so by any fraudulent scheme, trick, device or false pretense.”  The parties disagreed about whether the company suffered a “physical loss” because the money lost was in the form of intangible electronic funds.  Citing to case law and other policy provisions, the court ultimately found that there were two different reasonable interpretations, and thus according to Montana law, the ambiguity must be construed against the insurer.  Next, the court found that two sections of the policy afforded coverage for the loss, while a third coverage part, which expressly required that the loss be “physical loss,” did not apply.

Having determined that the policy afforded coverage, the court then addressed the amount of the loss that the company had the right to recover.  The policy provided that the insured was entitled to a specified amount “per occurrence.”  While the company argued that there were four separate thefts and therefore four occurrences, the insurer contended that the four transfers represented a series of related acts and thus a single occurrence.  Finding that this part of the case was not fully developed, the court instructed the parties to address the occurrence issue in separate briefing.