Canada: First National Bank Of Northern California: Ninth Circuit Analyzes Scope Of "Customer" Under Financial Institution Bond's Telefacsimile And Voice Instruction Transactions Coverage

Last Updated: June 12 2015
Article by David S. Wilson and Christopher McKibbin

In First National Bank of Northern California v. St. Paul Mercury Insurance Company, the Ninth Circuit Court of Appeals analyzed certain requirements for Telefacsimile and Voice Instruction Transactions coverage under a Financial Institution Bond issued by St. Paul (now Travelers) to First National Bank of Northern California (the "Bank"). The decision highlights the importance of clearly establishing the exact contractual arrangement between the insured financial institution and its customer in analyzing these types of transfer coverages.

The Facts

The Bank's customers, Brent and Paula Edwards, were trustees for the Edwards Living Trust. Mr. and Ms. Edwards opened an account (the "Account") with the Bank in 2009. They received a Deposit Account Agreement and Disclosure (the "Account Opening Agreement"). They also signed a signature card in which they "agree[d] to the terms of" and "acknowledge[d] receipt of a completed copy of this agreement, the accompanying terms and conditions, and policy disclosures."

The Account Opening Agreement included the following provision:

 With respect to wire transfers or other transfers of funds not governed by the Electronic Funds Transfer Act, [the customers agree] to enter into and comply with [the Bank's] wire transfer (if applicable) agreement and to comply with [the Bank's] security procedures.

The Bank's security procedures (the "Security Procedures") were not provided to Mr. and Ms. Edwards, although the Bank asserted that the Security Procedures were "easily available" to them. The Security Procedures purportedly authorized the Bank to rely on voice and facsimile instructions to make wire transfers from the Account in two circumstances:

  • if there was a wire transfer agreement on file; or,
  • if, in the absence of a wire transfer agreement on file, the customer could still be verified by voice recognition or by password, government-issued ID, date of birth, or Social Security number.

The Bank never provided any wire transfer agreement to Mr. and Ms. Edwards.

On October 13, 2010, the Bank received a phone call from someone purporting to be Mr. Edwards, instructing it to transfer $412,876 from the Account to a bank in Thailand. The Bank obtained verification information and processed the transfer. The next day, the Bank received another call, seeking to transfer $98,876 to a bank in China. After obtaining the same verification information, the Bank processed this transfer as well.

Mr. and Ms. Edwards discovered the fraudulent transfers. The Bank repaid them and made a claim against Travelers under the Bond.

The Telefacsimile and Voice Instruction Transactions Coverage

The Bank's Telefacsimile and Voice Instruction Transactions coverage indemnified the Bank where it:

suffers a loss directly from ... having in good faith ... transferred funds on deposit in a Customer's account in reliance upon a fraudulent telephonic voice instruction ... which purports to be from ... an individual person who is a Customer ..."

The definition of "Customer" contained three requirements:

an entity or natural person that:

(i)         has a written agreement with the Insured authorizing the Insured to rely on telephonic voice or Telefacsimile Device instructions to make transfers;

(ii)        has provided the Insured with the names of persons authorized to initiate such transfers; and

(iii)       with whom the Insured has established an instruction verification procedure other than voice recognition.

Travelers declined coverage, pointing out that the Bank had not established that there was any written agreement between the Bank and Mr. and Ms. Edwards authorizing the Bank to rely on telephonic voice or Telefacsimile Device instructions to make transfers. In other words, Mr. and Ms. Edwards had not agreed to the wire transfer agreement, or to the Security Procedures.

The Decision

The key issue became whether the Bank could impute the wire transfer agreement and/or the Security Procedures to Mr. and Ms. Edwards, on the basis that they had received the Account Opening Agreement and had signed the signature card. The Bank asserted that the Account Opening Agreement required Mr. and Ms. Edwards to agree to enter into, and comply with, the wire transfer agreement and to comply with the Bank's Security Procedures, notwithstanding that Mr. and Ms. Edwards never in fact agreed to do so, and never received copies of these documents.

The Ninth Circuit rejected this argument, holding that neither the wire transfer agreement nor the Security Procedures had ever formed part of the contractual arrangements between the Bank and Mr. and Ms. Edwards. The Court observed that a contract may validly include provisions of a document not part of the physical contract, so long as the incorporation by reference is "clear and unequivocal" and the terms of the incorporated document are known, or readily available, to both parties. The Court held that the Bank had failed to establish that here:

... the signature card, account agreement, and security procedures did not qualify as a "written agreement" under the bond definition. The signature card, which is the only document that the Edwardses actually signed, does not refer to the account agreement or the security procedures. The security procedures were not provided to the Edwardses. The signature card does not contain any authorization for a wire transfer from the account by voice or fax authorization. Under these undisputed facts, the district court properly concluded that the combined signature card, account agreement, and security procedures did not constitute a written agreement with the Bank authorizing it to rely on wire transfer instructions communicated by phone or fax. Therefore, the district court correctly concluded that the Edwardses did not qualify as "customers" within the meaning of the bond.


Telefacsimile and Voice Instruction Transactions and similar transfer coverages are some of the most technical coverages in Financial Institution Bonds and other forms of fidelity coverage. In this case, the Bank was unable to establish that its contractual arrangement with Mr. and Ms. Edwards brought them within the Bond's definition of "Customer", notwithstanding that they had agreed to be bound by Security Procedures which arguably might have authorized the transfers. The decision reinforces the importance of carefully analyzing the exact contractual relationship between the insured financial institution and its customer to ensure that all coverage requirements are fulfilled.

First National Bank of Northern California v. St. Paul Mercury Insurance Company, 2015 WL 2225044 (9th Cir.)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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David S. Wilson
Christopher McKibbin
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