Insurers’ recalcitrance to providing coverage for the “Business E-mail Compromise” (BEC) scam is a topic we’ve frequently discussed. On Monday, the Ninth Circuit heard oral argument in a BEC coverage action, Taylor & Lieberman v. Federal Insurance Company.
The fraudster in that case sent spoofed e-mails in 2012 to an accounting firm purporting to be from one of the firm’s clients. At the “client’s” request, the accounting firm executed two wire transfers from the client’s bank account, over which the firm had power of attorney, in amounts just under $100,000 each to banks in Malaysia and Singapore. The firm finally detected the scheme when it called the client for confirmation after receiving a third e-mail requesting another transfer of $128,000 to Malaysia. The accounting firm was able to recover most of the first wire transfer but nothing from the second, resulting in a $100,000 loss to the client’s account, which the firm restored.
The accounting firm sought reimbursement for the lost funds under the forgery coverage, computer fraud coverage, and funds transfer coverage of its crime policy. In the subsequent coverage action, the California federal district court judge granted summary judgment to the insurer in June 2015. The judge determined that none of the coverages applied to the client’s third-party loss because each coverage was limited to payment for “direct loss sustained by an Insured.” The judge rejected the accounting firm’s argument that its power of attorney over the client’s bank account meant that the fraudulent transfers constituted direct, first-party loss. He noted that the funds were not held by the firm but in a separate bank account owned by the client, and that the circumstances of the loss were too remote to qualify as “direct loss.”
During Monday’s oral argument, the panel judges extensively questioned both parties as to whether the accounting firm’s power of attorney over the client’s bank account indicated that the client’s funds should be considered the firm’s covered property under the policy. One of the judges queried where the liability would lie if, after someone stored their coat in a train station locker and entrusted the key to another person, the key was then misappropriated and the coat stolen. Stay tuned for our analysis of the appellate decision.