A New Jersey federal district court has held that a commercial crime policy does not afford coverage for a loss caused by a fraudulent wire instruction scheme where an imposter, posing as the insured, directed the insured’s customer to pay receivables to the impostor’s account. Posco Daewoo America Corp. v. Allnex USA, Inc., No. 52:17-cv-00483-JMV-MF (D.N.J. Oct. 31, 2017). The court did not address threshold issues regarding trigger and causation but instead held that there was no coverage because the insured did not own the funds at issue.
The insured, a chemicals supplier, was owed money by its customer. An impostor, posing as one of the insured’s accounting employees, sent a series of emails to the customer and convinced it to wire $630,058 to the impostor’s bank accounts. After the fraud was discovered, the customer recovered some of the funds but was unable to recover $367,613.46. The customer claimed that its wire transfers satisfied its payment obligations to the insured. The insured submitted a claim under its commercial crime policy, but the insurer denied coverage. The insured later sued its customer and its insurer seeking payment for the lost funds.
Ruling on the insurer’s motion to dismiss, the court held that the loss was not covered under the crime policy. At the outset, the court noted disagreement about whether the incident met the “direct loss” requirement of the policy’s “Computer Fraud” coverage and whether there was covered “Computer Fraud” in the first place. The court held that the loss was not covered in any event, however, because the “Ownership of Property; Interests Covered” provision was dispositive. In relevant part, the Ownership of Property clause limited coverage to amounts owned by the insured. The court ruled that while the insured may have “owned” something of value – a receivable, or a right to payment (and a potential cause of action if payment was not made) – the insured did not “own” the funds in the accounts either before or after the fraudulent transfer. The court also rejected the insured’s argument that the term “own” was ambiguous because it was not defined and its citation to various types of ownership interests. Relying instead on the plain meaning of “own,” the court held that the customer’s intent to transfer money to the insured was not sufficient to constitute ownership by the insured.