Last week, the Fifth Circuit affirmed that a title company’s crime protection policy applies to cover loss from a fraudulent wire transfer. The insurer, RLI Insurance Company (RLI), had argued that the $250,945.31 transfer was not covered under the funds transfer fraud endorsement because the instruction that led to the transfer was authorized and approved by the insured, Valero Title Inc. (Valero). Specifically, a Valero employee instructed Valero’s bank to wire the funds to a fraudulent account after a fraudster posing as a lender’s employee intercepted email communications regarding a payoff transaction and deceptively instructed the transfer.
Valero purchased a crime-protection policy from RLI. The policy provided that RLI “will pay for loss of funds resulting directly from a fraudulent instruction directing [sic] financial institution to transfer, pay or deliver funds from your transfer account.” The relevant definition of “fraudulent instruction” describes it as a “written instruction . . . issued by you, which was forged or altered by someone other than you without your knowledge or consent, or which purports to have been issued by you, but was in fact fraudulently issued without your knowledge or consent[.]”
The parties agreed that this definition creates two coverage scenarios: (1) “Clause A” coverage for a “written instruction . . . issued by you, which was forged or altered by someone other than you without your knowledge or consent,” and (2) “Clause B” coverage for a “written instruction which purports to have been issued by you, but was in fact fraudulently issued without your knowledge or consent.” RLI argued that because the instruction was issued as it was authorized and approved by Valero, it could not implicate Clause A coverage.
Fifth Circuit Affirms Finding of Coverage
Relying on “ordinary contract principles,” such as looking to the “plain language of the policy, examining the entire agreement and seeking to harmonize and give effect to all provisions so that none will be rendered meaningless,” the Fifth Circuit affirmed the district court’s holding that the policy provided coverage. The Fifth Circuit held that “the only interpretation of Clause A that does not render Clause B meaningless is one in which a written instruction is forged or altered by someone other than the insured without the insured’s knowledge or consent prior to being issued by the insured.” The Fifth Circuit rejected various hypothetical scenarios RLI proposed that would implicate Clause A. For example, RLI argued that if Valero had forwarded the exact email sent from the fraudster to Valero’s bank instead of writing its own separate email, then Clause A would be implicated. The Fifth Circuit disagreed, finding that in RLI’s scenario, the instruction would be issued by the lender, and in any event, it would still be a fraudulent instruction that was “forged or altered by someone other than [Valero] without [Valero’]s knowledge or consent.”
As the frequency and value of fraudulent transfer losses increase, insurers are taking increasingly narrow views of coverage for these losses. However, the Fifth Circuit’s decision confirms that when applying basic contract law and interpretative principles, coverage for such losses does indeed exist and insurers’ attempts to parse language and circumstances will not win the day. Nevertheless, the decision stands as yet another reminder to review policy wording carefully to ensure that it clearly reflects the intent and scope of expected coverage. Where issues arise, clarifications can be made, but that typically must occur before the policy is issued. Experienced coverage counsel can help ensure that the wording of your next policy is consistent with your expectations of coverage.