9th Circuit resurrects phishing victim’s lawsuit against insurer

Pedestrians walk past the United States Court of Appeals James R. Browning Building, seat of the 9th United States Circuit Court of Appeals, in San Francisco, California. REUTERS/Noah Berger

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  • Fraudulent emails were a direct cause of loss under the Commercial Crime Policy
  • Lower court says duped employee broke chain of causation by authorizing payment

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(Reuters) – A real estate company that lost $200,000 can sue its commercial crime insurer for refusing to cover the loss, a federal appeals court ruled on Wednesday, finding that an employee’s unwitting participation in a phishing scheme did not change the interpretation of the eligible persons policy. fraud.

The 9th United States Circuit Court of Appeals overturned a decision by a Los Angeles federal judge, who had dismissed Ernst and Hass Management’s lawsuit against specialty insurer Hiscox Inc. The trial court had concluded that the losses were not “directly” caused by the fraud, as required policy, but by the “intermediate acts” of the duped employee who authorized the wire transfers.

“This 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 first-print case for the circuit.

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

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

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

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

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

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

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

The 9th Circuit concluded that if the alleged facts were true, the 2012 policy would cover the loss. He declined to weigh in on coverage under the 2019 policy, referring the case to Birotte to consider that issue 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 from Bastian & Dini

For Hiscox: Joseph Oliva of Goldberg Segalla

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