9th Circuit resuscitates phishing victim's suit against insurer

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Pedestrians pass the James R. Browning U.S. Court of Appeals Building, home of the 9th U.S. Circuit Court of Appeals, in San Francisco, California. REUTERS/Noah Berger

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  • Fraudulent emails were direct cause of loss under commercial crime policy
  • Lower court said duped employee broke causal chain by authorizing payment

(Reuters) - A real estate firm that lost $200,000 can sue its commercial-crime insurer for refusing to cover the loss, a federal appeals court held Wednesday, concluding that an employee's unwitting participation in a phishing scheme did not alter the policy's interpretation of eligible fraud.

The 9th U.S. Circuit Court of Appeals reversed a ruling by a federal judge in Los Angeles, who dismissed Ernst and Hass Management’s lawsuit against specialty insurer Hiscox Inc. The lower court had found the losses were not “directly” caused by fraud, as the insurance policy required, but by the “intervening acts” of the duped employee who had authorized the wire transfers.

“That reasoning — that this fraud became ‘authorized’ precisely when it succeeded — cannot be the correct reading” of the insurance policy, Circuit Judge Lawrence VanDyke wrote in a case of first impression for the circuit.

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“There was no intervening event,” VanDyke added. Instead, the employee, “acting pursuant to the fraudulent instruction ‘directly’ caused the loss of the funds.” VanDyke was joined by Circuit Judge Ryan Nelson and U.S. District Judge Karen Schreier of South Dakota, sitting by designation.

Ernst’s attorneys at Bastian & Dini did not immediately respond to requests for comment.

Hiscox’s lead counsel, Joseph Oliva of Goldberg Segalla, also had no immediate response.

According to the 9th Circuit, an accounts payable clerk at Ernst received three emails from an imposter posing as her boss in March 2019. The emails instructed her to wire $50,000, $150,000, and $470,000 to Zang Investments.

The clerk authorized the first two payments, discovering the fraud when she called her boss to confirm the third one.

Ernst then filed a claim for $200,000 with Hiscox under the “computer fraud” and “funds transfer fraud” provisions of its commercial crime policy, and sued the insurer for damages, unfair trade practices and bad faith after its claims were denied.

The parties disagreed about whether the terms of Ernst and Haas’s original policy, from 2012, applied, or the more restrictive terms of its most recent update in 2019. U.S. District Judge Andre Birotte assumed without deciding that the 2012 policy applied, but agreed with Hiscox that it provided no coverage for losses from duly authorized “albeit unwitting” wire transfers.

The 9th Circuit found that if the facts alleged were true, the 2012 policy would cover the loss. It declined to weigh in on coverage under the 2019 policy, sending the case back to Birotte to consider that question and Hiscox’s other potential defenses.

The case is Ernst and Haas Management Co. Inc. v. Hiscox Inc., 9th U.S. Circuit Court of Appeals, No. 20-56212.

For Ernst and Haas: Robert Bastian Jr and Marina Rose Dini of Bastian & Dini

For Hiscox: Joseph Oliva of Goldberg Segalla

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