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Fraudulent Wire Transfer Not Covered Under Pennsylvania Commercial Policy (PA)

May 21, 2021

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<p style="text-align: justify;">The U.S. District Court in the Eastern District of Pennsylvania recently ruled that an insurance policy only covered a company for fraud based on checks, promissory notes or similar “negotiable instruments”.  In <a href="https://www.wcmlaw.com/wp-content/uploads/2021/05/Ryeco-LLC-v.-Selective-Insurance-Company.pdf"><em>Ryeco, LLC v. Selective Insurance Company</em></a><em>,</em> fraudulent wire transfer authorizations were not covered by an organization’s insurance policy.</p>
<p style="text-align: justify;">The underlying incident occurred when a hacker posed as Ryeco, LLC’s (“Ryeco”) Vice President and issued a number of unauthorized emails to Ryeco’s bank.  These emails requested that the bank execute wire transfers premised on false Wire Transfer Authorization Forms.  Ultimately, Ryeco’s bank executed the transfers over the course of fifteen separate transactions totaling $1.4 million.</p>
<p style="text-align: justify;">Thereafter, Ryeco sought coverage for its losses from Selective Insurance Company (“Selective”) under a Forgery or Alteration endorsement through its commercial crime policy.  In response, Selective denied the claim.  As a result of Selective’ s denial, Ryeco filed a lawsuit claiming breach of contract and bad faith against Selective.  As both parties moved for summary judgment, the sole issue before the Court was whether the Forgery or Alteration provision applied as a matter of contract interpretation.</p>
<p style="text-align: justify;">Specifically, the parties differed over whether the emails sent from Ryeco’s hacked email account or the corresponding false Wire Transfer Authorization Forms attached to the hacked emails were “written promises, orders or directions” to pay a sum certain similar to checks, drafts or promissory notes as defined by the Policy.  Selective argued that neither qualified as a “negotiable instrument” such that the Policy’s provision would be triggered.  Additionally, Selective urged the Court to apply the interpretive canon of <em>ejusdem generis</em> wherein “general words follow an enumeration of persons or things, by words of a particular and specific meaning, such general words are not to be construed in their widest extent, but are to be held as applying only to the persons or things of the same general kind or class as those specifically mentioned.”</p>
<p style="text-align: justify;">Ultimately, the Eastern District of Pennsylvania concluded that the Forgery or Alteration provision, when read as a whole, did not afford coverage to Ryeco.  The Court noted that the Wire Transfer Authorization Forms were not “similar written promises, orders or directions to pay a sum certain of ‘money’” because they were not similar to checks, drafts, or promissory notes.  The Court opted not to construe the Policy’s language in the broadest sense and, instead, construed the language to align with the items specifically listed under the Policy.</p>
<p style="text-align: justify;">Furthermore, the Court noted that the lack of coverage for Ryeco’s loss was underscored by the fact that Selective also independently offered coverage for losses resulting from “funds transfer fraud” and “computer fraud”.  However, Ryeco did not opt to purchase such coverage.  Additionally, the “funds transfer fraud” provision plainly states that it covers “written instructions <em>other than those described</em>” in the Forgery or Alteration provision.  As such, the Court recognized that these various commercial crime coverages applied to different risks and specifically excluded overlapping coverage.</p>
<p style="text-align: justify;">Thanks to Zhanna Dubinsky for her contribution to this post.  Please email<a href="mailto:gcoats@wcmlaw.com"> Georgia Coats</a> with any questions.</p>

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