United States: Phishing For Coverage Under Crime Policies

Originally published by Law360, May 22nd, 2017


Co-author: Marc D. Schein, a certified insurance counselor and commercial lines coverage specialist, is a risk management consultant for Marsh & McLennan Agency LLC.


Crime policies, among others, typically provide what seems like a broad grant of computer coverage, such as "We will pay for loss ... resulting directly from the use of any computer to fraudulently cause a transfer ... ." Apache Corp. v. Great American Insurance Co., 2016 WL 6090901(5th Cir. 2016). Companies victimized by phishing schemes have sought coverage under the computer provisions of their insurance policies for their losses. They have met with no success in the courts.

The preliminary question is: what is phishing? In brief, it's a fraudulent attempt usually delivered by email, to induce a target to reveal sensitive information, such as passwords or credit card numbers — or to wire money directly as instructed by the fraudster. Typically, a phisher will send out thousands, sometimes millions, of emails that appear to come from a known party or a trusted company. The attack tries to evoke an emotional response to a hoax crisis. It's not uncommon for the email to direct the recipient to send money to a spoofed website. Phishing schemes have become very common, and can result in substantial losses. Unless a company has the right policies and procedures in place to detect phishing attacks, it is possible the attacks can continue for months, even years. Practices to prevent phishing losses should include: 1) make sure employees know how to identify suspicious emails; 2) never go to a bank's website from a link found in an email; 3) audit your company's network security; 4) review the email address of the sender of the email for inconsistencies and variations in spelling; 5) check your financial accounts frequently; 6) input sensitive data through secure web portals only; and 7) implement two factor authentication.

Apache is a typical phishing case. It involved "authorized payments of legitimate invoices from its vendor to the criminal's bank account ... ." Apache received an email attachment on its vendor's letterhead with old and new (fake) bank account numbers. Apache called the number on the letterhead to confirm the change in bank account numbers. Apache then approved the change and wired money to the fake bank account. Apache had not noticed that while the vendor's email address was "petrofac.com," the sender's address on the email was "Apache is a typical phishing case. It involved "authorized payments of legitimate invoices from its vendor to the criminal's bank account ... ." Apache received an email attachment on its vendor's letterhead with old and new (fake) bank account numbers. Apache called the number on the letterhead to confirm the change in bank account numbers. Apache then approved the change and wired money to the fake bank account. Apache had not noticed that while the vendor's email address was "petrofac.com," the sender's address on the email was "petrofactltd.com," a fraudulent email created by the criminals. Within one month, the real Petrofac asked where its money was, and Apache uncovered the scheme and found it had lost about $2,400,000. Apache made a claim for the loss under the computer provision of its crime policy with Great American Insurance Company. Great American denied coverage, and coverage litigation ensued.

The trial court found the insurance policy covered Apache for the loss. It rejected Great American's argument that the loss was not direct because of intervening factors — "the intervening steps of the [post-email] confirmation phone call and supervisory approval do not rise to the level of negating the email as being a 'substantial factor.'" The Fifth Circuit reversed, finding that the only "computer use" was the use of the email as part of the overall scheme. The court then found that "the email was merely incidental to the occurrence of the authorized transfer of money ... To interpret the computer fraud provision as reaching any fraudulent scheme in which an email communication was part of the process would ... convert the computer fraud provision to one for general fraud." Taylor & Lieberman v. Federal Insurance Co., 2017 U.S. Lexis 42056 (9th Cir. 2017), another phishing case, is also instructive. Taylor & Lieberman, an accounting firm, suffered a phishing loss resulting from emails instructing it to wire money to fake accounts.

Taylor & Lieberman sought insurance coverage under its fidelity policy, which provided coverage for forgery, computer fraud and funds transfer fraud. The Ninth Circuit found that none of these coverage grants provided coverage for the loss. In particular, the policyholder argued that the computer fraud coverage should apply, inter alia, to unauthorized entry into the computer system. The court held that the sending of an email was not an unauthorized entry.

Incomm Holdings Inc. v. Great American Insurance Company, 2017 WL 1021749 (N.D. Ga. 2017) involved prepaid debit card system fraud. The court held that the policyholder's loss was not direct. Great American Insurance Company argued that the fraud was committed using a phone rather than a computer. The crime policy read as follows: "The Insurer will pay for loss of, and loss from damage to, money, securities, and other property resulting directly from the use of any computer to fraudulently cause a transfer of that property from inside the premises or banking premises: (a) to a person (other than a messenger) outside those premises; or (b) to a place outside those pre  mises." Once again, the court found that the loss was not directly caused by a computer.

Conversely, at least one court found coverage for hacking — that is, an invasion of a company computer system that involved an employee's error, but not her direct action to transfer funds. In Bank of Bellingham v. BancInsure Inc., 823 F. 3d 456 (8th Cir. 2016), a secretary accidentally left her computer on all night, and a hacker accessed the system. The bank had a financial institution bond that included insurance coverage for computer system fraud. The insurance company argued against coverage, asserting that the secretary was the efficient proximate cause of loss. The court disagreed, and held that the hacking was the efficient proximate cause.

What distinguished Bank of Bellingham from the phishing cases? Insurance companies have different attitudes toward hacking and phishing. In hacking, the computer is central; emails need not be involved. With phishing, the use of a computer may be limited to emails. A hacker's entry into the computer is fully unauthorized, whereas with phishing, the entry is permitted by the company through the phisher's subterfuge. Moreover, hacking does not involve any voluntary action by the company. With phishing, insurance companies contend that the transfer of funds is voluntary, even if fraudulently induced. Finally, all of these issues contribute to the insurance companies' argument that phishing losses are not 'directly' related to the computer.

Help may be on the way. Some insurance companies have now taken notice of policyholders' need for phishing coverage, and are addressing this issue — for example, by including phishing coverage in their crime policy when requested by a broker to an insurance company. Cyberinsurance policies are able to cover loss from phishing if the policy provides a cybercrime element. To avoid coverage gaps, the crime policy should work in coordination with the cyberinsurance policy to provide a holistic approach to the phishing exposure and also other cyber exposures. This is a clear example where policyholders need to think of their insurance brokers as strategic partners, rather than vendors who provide quotes. It is imperative to conduct due diligence to find the right broker who has the knowledge and market knowledge to obtain the best available coverage and policy wording. Moreover, the insurance professional with whom a company works should understand its business and risk tolerance.


Robert D. Chesler is a shareholder at Anderson Kill PC's office in Newark, New Jersey. He is a member of the firm's cyberinsurance recovery group.


About Anderson Kill

Anderson Kill practices law in the areas of Insurance Recovery, Commercial Litigation, Environmental Law, Estates, Trusts and Tax Services, Corporate and Securities, Antitrust, Banking and Lending, Bankruptcy and Restructuring, Real Estate and Construction, Foreign Investment Recovery, Public Law, Government Affairs, Employment and Labor Law, Captive Insurance, Intellectual Property, Corporate Tax, Hospitality, and Health Reform. Recognized nationwide by Chambers USA for Client Service and Commercial Awareness, and best-known for its work in insurance recovery, the firm represents policyholders only in insurance coverage disputes - with no ties to insurance companies and has no conflicts of interest. Clients include Fortune 1000 companies, small and medium-sized businesses, governmental entities, and nonprofits as well as personal estates. Based in New York City, the firm also has offices in Philadelphia, PA, Stamford, CT, Washington, DC, Newark, NJ and Los Angeles, CA.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Freeborn & Peters LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Freeborn & Peters LLP
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions