NJ Federal Court Rejects E&O Insured’s Claim for Spoofing Loss
In Authentic Title Services, Inc. v. Greenwich Insurance Company, et. al, the District Court of New Jersey held that coverage was barred under an E&O Policy for a loss resulting from a spoofing scam based on an exclusion for claims resulting from “misappropriation” of funds.
The insured, Authentic Title Services, obtained a Title Professional Liability Errors and Omissions policy from Greenwich Insurance Company, which incepted in 2015. While the policy was active, Authentic acted as a title and settlement agent for a real estate transaction in South Orange, New Jersey. Authentic deposited the loan proceeds in its settlement account, although they remained the property of the lender. The closing was later postponed, and Authentic’s president received an email from a person purporting to be the lender seeking a return of the funds. After receiving additional spoofed emails from other parties allegedly working with the lender, Authentic’s president deposited $480,750 in an account that belonged to a fraudster. The funds were never recovered.
When Authentic sought coverage from Greenwich, Greenwich denied coverage, in part, based on a policy exclusion for claims “based on or arising out of … a. the commingling, improper use, theft, stealing, conversion, embezzlement or misappropriation of funds or accounts.” In the ensuing declaratory judgment action in New Jersey federal court, the Court agreed that the exclusion barred coverage. Citing New Jersey courts’ expansive definition of the phrase “arising out of,” the court held that the claim “undeniably originated from, grew out of, or had a substantial nexus to funds belonging to [the lender] that were transferred into the Fraudulent Account and then were withdrawn by a person or entity other than [the lender] and were never recovered.”
As the Court noted, the main dispute was whether a “theft,” “stealing,” “commingling,” “embezzlement,” or “misappropriation” occurred. Specifically, Authentic argued that because some of the terms applied to only first party conduct (as opposed to third party conduct) the terms were ambiguous and did not apply to this loss. However, the Court held that Authentic’s interpretation would “introduce confusion” and held that the plain terms of the exclusion barred coverage in this case. In so doing, the Court pointed to a District of Connecticut case applying the exclusion based on similar facts. See Accounting Resources, Inc. v. Hiscox, Inc., 2016 WL 5844465 (D. Conn. Sept. 30, 2016).
The case law involving claims related to spoofing scams remains relatively sparse. As Authentic demonstrates, however, the rules of policy construction apply with equal force even though the underlying fact patterns may be novel.
Thanks to Doug Giombarrese for his contribution to this post. If you have any questions or comments, please contact Colleen Hayes.