United States: Court Holds Crime Policy Covers Business Compromise Email Loss

The "business compromise email" is what the FBI calls the "$5 billion scam," but apparently an insurance company did not agree with an insured company that they had been the victim of a crime.

A federal court recently found that a crime policy afforded coverage for a $4.8 million wire transfer that an insured company was duped into making. See Medidata Solutions, Inc. v. Federal Ins. Co., 15-CV-907 (SDNY July 21, 2017). In this case, the thief took advantage of "real" facts, posing as the insured's attorney for a corporate transaction. More specifically, the insured was contemplating an acquisition and, as part of that process, the president instructed the finance department to be prepared, on an urgent basis, to assist with the transaction. Apparently, the insured used Gmail as its email platform. Under that system, Gmail would use company employee profiles to display the sender's information, such as name and picture, on their emails. Aware of the Gmail platform, the thief sent emails to the insured's finance department – and, in those emails, embedded a computer code which caused Gmail to populate the "spoofed" email with the insured company president's name and picture. In the "spoofed" email, the president informed the finance department that the insured's attorney would be calling and to assist him with his requests. The thief (posing as the attorney) allegedly called the finance department, requesting a wire transfer of $4.8M for purposes of the transaction. To the insured's credit, the finance employee told the attorney that, to send the wire transfer, she would need (i) an email from the president authorizing the transfer; and (ii) approval from two other insured employees. Thereafter, a "spoofed" group email was purportedly sent from the insured's president authorizing the wire transfer. The payment was made. When a second wire was requested, one of the insured's employees became suspicious about the "reply to" field, which led to the insured uncovering the fraud.

The relevant crime policy contained three coverages: (i) computer fraud coverage; (ii) funds transfer fraud coverage; and (iii) forgery coverage. The insurer denied coverage under the computer fraud coverage, arguing that, for this coverage to apply, there must be unauthorized access into the insured's computer system; a manipulation of the insured's computers; or input of fraudulent information. According to the insurer, because the thief never actually "hacked" into the insured's computer system, there was no coverage. In other words, the insurer argued that, because the fraud occurred before the email was received by the insured, there was no coverage. As for the funds transfer fraud coverage, the policy provided coverage for "fraudulent electronic ... instructions ... purportedly issued by an Organization, and issued to a financial institution to transfer ... Money ... from an account maintained by such Organization ... without the Organization's knowledge or consent." Because the transfer occurred with the insured's apparent knowledge and consent, the insurer denied coverage under this provision.

The federal court disagreed with the insurer, finding that both the computer fraud coverage and funds transfer fraud coverage applied. First, the federal court found that the fraud constituted "deceitful and dishonest access" to the insured's computer. (Of course, the FBI would also agree with this.) The federal court also found that, "where the perpetrator violates the integrity of a computer system through unauthorized access," the computer fraud coverage is implicated. Because the thief's computer code – to achieve the "spoof" – changed the true email address to the president's email address, there was entry into the insured's email system. The federal court also rejected the insurer's argument that there was no "direct nexus" between the "spoofed" email and the fraudulent wire transfer because there were intervening acts – such as the call with the purported attorney for the insured – that led to the fraudulent wire transfer. Given these events, the insurer argued that the fraud was caused by events other than the insured's computer use. The federal court disagreed, effectively finding that, "but for" the "spoofed" email, there would not have been a wire transfer. As for the funds transfer fraud coverage, the federal court found that this, too, applied because a third party "masked themselves as an authorized representative." The fact that the finance employee sent the wire transfer did not transform the wire into a valid transaction; "the validity of the wire transfer depended upon several high level employees' knowledge and consent which was only obtained by trick."

The Medidata case underscores for insureds and insurers the reality that thieves are becoming more and more sophisticated with respect to cyber crimes—in this case, using an insured's own email system to deceive its employees. As technology continues to develop, future cyber crimes may not fit neatly into insurance policy language, whether that policy is a crime, property or stand-alone cyber policy. Accordingly, it is critically important that, at the negotiation stage, before a policy is issued, both insureds and insurers have a mutual understanding of the coverage that a policy is intended to provide. Absent such an understanding, a decision about whether coverage does (or does not) exist will be left to the courts to decide.

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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