Phishing victim can't claim $5 mln loss for money it never ‘held’

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REUTERS/Dado Ruvic/Illustration
  • Online portal provider RealPage only controlled account information, not moneyCourt said the losses were of money the company never actually handled

(Reuters) - A commercial-crime insurance policy didn’t cover RealPage for a $5 million phishing loss because the property-management service provider never “held” any of the purloined money, a federal appeals court held.

The 5th U.S. Circuit Court of Appeals affirmed a win for AIG’s National Union Fire Insurance Company of Pittsburgh, which covered RealPage against losses from theft of property that the company owned, leased, or “held for others.”

The appeals court said RealPage’s loss didn’t qualify: it had only provided information and instructions to an online payment processor, Stripe, which transferred rent money from tenants to the property management firms that RealPage represented.

“In other words, when money changed hands, RealPage’s fingers never touched it,” Circuit Judge Cory Wilson wrote, joined by Chief Circuit Judge Priscilla Owen and Circuit Judge Edith Jones.

According to the complaint RealPage filed in federal court in Dallas, “bad actors” obtained its log-in credentials in April 2018 by sending an email that appeared to be from Stripe, complete with a bogus link.

The scammers used the log-in credentials to divert about $10 million in payments. However, RealPage quickly detected the swindle and notified Stripe, which was able to stop payment or recover nearly $4 million.

RealPage reimbursed its client property managers for the rest, and filed a claim for more than $6 million with National Union and its excess carrier, Beazley Insurance.

National Union concluded that RealPage “owned” about $1 million in service fees that it would have received had the transactions been legitimate, but denied coverage for the remaining $5.1 million because RealPage never “held” that money because it never possessed it.

The district court agreed, entering judgment for both insurers in March.

On appeal, RealPage argued that possession was unnecessary and that it “held” the funds by controlling the payment instructions. The 5th Circuit disagreed.

“While Stripe handled the funds as RealPage directed, Stripe, not RealPage, ultimately controlled the funds in Stripe’s custody — demonstrated by the very fact that RealPage could do nothing to recover the stolen funds without Stripe’s help,” the court held.

National Union’s lead lawyer, Darin Brooks of Gray Reed & McGraw, declined to comment on Wednesday. RealPage’s lawyers at Pillsbury Winthrop Shaw Pittman did not immediately respond to requests for comment.

The case is RealPage Inc v. National Union Fire Insurance Company of Pittsburgh, Pennsylvania, 5th U.S. Circuit Court of Appeals, No. 21-10299.

For RealPage: Barry Fleishman and Tamara Bruno of Pillsbury Winthrop Shaw Pittman

For National Union and Beazley Insurance: Darin Brooks of Gray Reed & McGraw and John Riddle of Clark Hill

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