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November 7, 2017

Legal Update
John G. O'Neill, Jessica H. Park

Court dismisses claim for coverage of email “spoofing” scam under crime policy

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A federal court in New Jersey has found that a business’s crime insurance policy did not provide coverage for losses the business sustained from an email “spoofing” scam— the latest in a number of recent cases that have addressed the availability of insurance coverage for such claims.

In Posco Daewoo America Corp. v. Allnex USA, Inc., the insured business, Daewoo, was a product supplier to a chemical company, Allnex, and was owed payment. An imposter posing as a Daewoo employee emailed Allnex that Daewoo wanted to change the bank accounts to which Allnex would wire its payments. Allnex complied with the impostor’s instructions and wired payments to the fraudulent accounts totaling nearly $400,000. After the fraud was discovered, Daewoo sought to recover from Allnex on the still-outstanding invoices, and also made a claim on its crime insurance policy with Travelers. When both refused to pay, Daewoo sued.

Travelers moved to dismiss the complaint, arguing that the crime policy clearly provided no coverage for such losses. The policy section at issue provided that it covered losses from “computer fraud,” defined as the “use of any computer to fraudulently cause a transfer of money” or other property. But the policy also specified that coverage was limited to money or other property that Daewoo “owns,” “leases,” or “holds for others,” or property for which Daewoo was “legally liable.”

The court agreed with Travelers that this limitation required dismissal of Daewoo’s claim for coverage, because the complaint did not offer any basis for finding that the $400,000 was Daewoo’s property. Allnex had surely intended to transfer the funds to Daewoo, but the payments had been diverted before legal transfer of ownership or possession, so the funds were legally the stolen property of Allnex, not Daewoo. The court made its dismissal without prejudice, giving Daewoo an opportunity to amend its pleadings, if possible, to address this problem.

The dismissal decision did not reach other issues in the case that were similar to those other courts have grappled with in recent decisions, such as whether the impostor’s use of email to accomplish the fraud would be sufficient “use of a computer” to trigger coverage, or whether something more like hacking or intrusion of Daewoo’s computer system was required. Nonetheless, the decision is another reminder of the many fact-specific obstacles that lie in the path of policyholders seeking coverage for these ever-more-prevalent “social engineering” scams.