The Second Circuit has rejected Chubb subsidiary Federal Ins. Co.’s request for reconsideration of the court’s July 6, 2018 decision, confirming that the insurer must cover Medidata’s $4.8 million loss under its computer fraud insurance policy. In July, the court determined that the loss resulted directly from the fraudulent e-mails. The court again rejected the insurer’s argument that the fraudster did not directly access Medidata’s computer systems. But the court again rejected that argument, finding that access indeed occurred when the “spoofing” code in emails sent to Medidata employees ended up in Medidata’s computer system.
In a recent post, we discussed the Sixth Circuit’s holding in American Tooling Center, Inc. v. Travelers Casualty and Surety Co. of America, No. 17-2014, 2018 WL 3404708 (6th Cir. July 13, 2018), where the Sixth Circuit reversed the district court’s summary judgment for the insurer, finding coverage under its policy for a fraudulent scheme that resulted in a $834,000.00 loss. The insurer, Travelers, has now asked the Court to reconsider its decision.
In a July 9, 2018 article appearing in Insurance Law360, Hunton Andrews Kurth insurance recovery practice head, Walter J. Andrews, explains why the Second Circuit’s decision in Medidata Solutions Inc. v. Federal Insurance Co., No. 17-2492 (2nd Cir. July 6, 2018), affirming coverage for a $4.8 million loss caused by a “phishing” e-mail attack, is a common sense application of the plain language of Medidata’s computer fraud coverage provision. As Andrews explained, “[c]learly, hijacking — or spoofing — email addresses constitutes an attack on a company’s computer system for which a reasonable policyholder should expect coverage. A computer is a computer is a computer. Everyone knows that — except for insurance companies.”
On July 6, 2018, the Second Circuit Court of Appeals affirmed a district court’s summary judgment award in favor of Medidata Solutions, Inc., finding that Medidata’s $4.8 million loss suffered after Medidata was tricked into wiring funds to a fraudulent overseas account, triggered coverage under a commercial crime policy’s computer fraud provision. The decision in Medidata Solutions, Inc. v. Federal Ins. Co., 17-cv-2492 (2d Cir., July 6, 2018), confirms a ruling by District Judge Andrew L. Carter, Jr., in which the district court found that a fraudsters manipulation of Medidata’s computer systems constitutes a fraudulent entry of data into the computer system, since the spoofing code was introduced into the email system.
Highlighting the continued problems faced by policyholders in obtaining coverage for “computer fraud,” a Michigan district court recently held that a manufacturer could not recover $800,000 in funds lost after an employee mistakenly wired payment for legitimate vendor invoices into a fraudster’s bank account after receiving a spoofed e-mail requesting payment. In American Tooling Center, Inc. v. Travelers Casualty and Surety Company of America, No. 16-12108 (E.D. Mich. Aug. 1, 2017), the district court applied state law favoring a narrow interpretation of the crime policy’s computer fraud provision to hold that the policyholder had not suffered a “direct” loss that was “directly caused” by the use of any computer.
Hunton & Williams insurance practice head Walter Andrews commented in a July 25, 2017, Law360 article concerning a New York federal court’s recent decision in Medidata Solutions, Inc. v. Federal Ins. Co., where the court found coverage for a $4.8 million “social engineering” loss that occurred after Medidata received fraudulent emails that caused accounting personnel to wire funds to a fake bank account in China. The decision, which was the subject of a July 24, 2017, Hunton blog post, focused on two main issues: (1) whether the fraudulent emails amounted to an infiltration of the bank’s computer systems; and (2) whether the fact that Medidata employees voluntarily initiated the funds transfer mattered under the terms of Medidata’s commercial crime insurance policy. Andrews succinctly addressed both issues, stating that “an employee being duped into transferring funds via email is functionally the same as the funds being stolen outright.” With the latter being unquestionably covered, so too should the former.
A federal judge in New York awarded summary judgment on Friday in favor of Medidata Solutions, Inc., finding that Medidata’s $4.8 million loss suffered after Medidata was tricked into wiring funds to a fraudulent overseas account, triggered coverage under a commercial crime policy’s computer fraud provision and funds transfer fraud provision. The award comes after District Judge Andrew L. Carter, Jr., ruled in March 2016 that additional expert discovery was needed concerning the manner in which the fraudsters manipulated Medidata’s computer systems.
The lawsuit, discussed in an August 18, 2016, Hunton & Williams blog post, arose after employees in Medidata’s finance department were deceived into transferring $4.8 million to a Chinese bank account based on emails that falsely appeared to come from a Medidata executive. Federal Insurance Company, a unit of Chubb Corp., insured Medidata under a policy providing coverage for, among other things, computer fraud, forgery and funds transfer fraud. Federal argued that Medidata’s claim was not covered because, among other things, there was no manipulation of Medidata’s computers and Medidata “voluntarily” transferred the funds.