United States: Computer Fraud: Two Similar Scams, Two Very Different Insurance Outcomes

Last Updated: September 6 2017
Article by William T. O’Neil

Two recent decisions by two different federal courts interpreting "Computer Fraud" insurance coverage reveal the limitations of cyber insurance in a rapidly changing cybersecurity landscape. Two businesses fell victim to fraudulent email tricks (known as "spoofing" or disguising an email to look as if it came from someone else) and ended up sending large amounts of money to unknown third parties, who quickly disappeared. Both turned to their "Computer Fraud" insurance coverage, and despite the apparent similarities in their claims and insurance policies, one court determined that the claim was covered while the other court did not. In the end, specific facts of the claims, slight differences in policy wording, and even the forum in which the cases are heard, can be the difference between a covered claim and a large cyber loss borne by an insured business.

I.  Two Similar Computer Frauds

In the first case, Medidata Solutions fell victim to a spoofing scam in September 2014. See Medidata Solutions Inc. v. Federal Ins. Co., No. 15-CV-907 (S.D.N.Y., July 21, 2017). As part of the scam, a third party was able to send multiple Medidata employees emails that looked like they came from the company president, even including his picture in the "from" field. The initial emails notified an employee in the finance group to expect a phone call from an outside attorney. An employee later received such a call, requesting that she initiate a wire transfer. The employee notified the scammer that she needed approval for such a transfer from the company President, Vice President and Director of Revenue. The Vice President and Director of Revenue then received a second fake email from the President, again displaying his correct email address and picture in the "from" field, instructing them to approve the wire transfer. On this instruction, the executives approved the wire payment of $4.7 million. A second attempt was made four days later, but this time the employees noticed that when replying to the President's e-mail, a "suspicious" e-mail address appeared in the "Reply to" field. A new email to the President revealed that he had never sent any of the authorizing emails, and the company contacted the FBI.

In the second case, a hack at American Tooling Center ("ATC") followed a similar course. See American Tooling Center, Inc. v. Travelers Cas. & Sur. Co., No. 16-12108 (E.D. Mich., August 1, 2017). ATC, a tool and die manufacturer out of Michigan, subcontracts some of its project to a Chinese vendor YiFeng. The standard practice was for YiFeng to submit invoices for completed work to ATC by email, which ATC paid by wire transfer. In March 2015, ATC contacted YiFeng for a list of outstanding invoices. The reply email told ATC to send wire payments for several legitimate outstanding invoices to a new bank account. The reply had come from a third party, who was able to make the email look as if it had come from YiFeng, as had been done in Medidata. ATC wired $800,000 to the new account, which promptly disappeared.

II.  Two Markedly Different Rulings

Both companies submitted claims for their losses to their insurance companies, and both claims were promptly denied. Both insureds filed suit in federal court – Medidata against Federal Insurance Company in the Southern District of New York and ATC against Travelers Casualty in the Eastern District of Michigan.   There their fortunes diverged.

Medidata's policy with Federal was labeled a "Federal Executive Protection" policy. The policy contained a "Crime Coverage Section" that included subsections for "Computer Fraud Coverage," "Funds Transfer Fraud Coverage," and "Forgery Coverage." The "Computer Fraud Coverage" provided coverage for the "direct loss of Money, Securities or Property sustained by an Organization resulting from Computer Fraud committed by a Third Party." "Computer Fraud" was defined as "the fraudulently induced transfer of Money, Securities or Property resulting from a Computer Violation." "Computer Violation" was defined as "the fraudulent (a) entry of Data into ... a Computer System." Federal denied the claim arguing that there was no "fraudulent entry of Data into Medidata's computer system." Since the emails were sent to an inbox authorized to receive such messages, the insurer argued that the entry of that email to the computer was authorized and therefore the loss not covered.

The court rejected this argument, ruling that the third party sending the email in Medidata was not an authorized user of the company email system, and his fraudulent activity met the standard of a "Computer Violation." The court noted that consistent with earlier New York precedent, the policy provided coverage for "fraud where the perpetrator violates the integrity of a computer system through unauthorized access" but did not provide coverage "for fraud caused by the submission of fraudulent data by authorized users."

Federal also argued that there was no "direct nexus" between the fraudulent email and the wire transfer, as the policy requires a "direct loss ... resulting from Computer Fraud." The court disagreed with a Fifth Circuit ruling in Apache Corp. v. Great American Ins. Co., 662 F.App'x 252 (5th Cir. 2016), that had denied coverage for a scam that included spoofed emails because the loss was not directly tied to the Computer Fraud. Instead, the court ruled that the "Medidata employees only initiated the transfer as a direct cause of the thief sending spoof emails posing as Medidata's president" and therefore the loss was "directly" tied to the fraud (and despite the fact that the scheme also included at least one phone call).

ATC argued many of the same claims to much different results. The Travelers policy covered "computer crime" with the provisions stating "[t]he Company will pay the Insured for the Insured's direct loss of ... Money, Securities and Other Property directly cause by Computer Fraud." "Computer Fraud" is defined as "the use of any computer to fraudulently cause a transfer of Money, Securities or Other Property from inside the Premises ... (1) to a person ... outside the Premises ...; or (2) to a place outside the Premises ...." As in Medidata, the insurer argued that the loss was not a direct result of the fraud. The ATC court, in contrast to the Medidata ruling, highlighted that between receipt of the fraudulent emails and the wire transfer, the insured had confirmed the production milestones that justify payment, authorized the transfers and initiated the transfers. These "intervening events" were relied upon to find that the transfers were not the "direct" result of the fraud. The ATC court relied on a prior Sixth Circuit ruling that had held the word "directly" meant "immediate" and "without anything intervening" under Michigan law. Of course, the Medidata employees had done much the same thing, and yet there the court held that the loss was a direct result of the fraud.

The ATC court attempted to distinguish the Medidata ruling by claiming that the policy language of the two policies were different, and that Medidata's coverage did not have the "directly caused by Computer Fraud" language. Medidata's policy did require the "direct loss of Money," but it did not reuse "directly" again before the term "Computer Fraud." The differences in the policy language appear to be ever so slight, but that difference appears to have been determinative in the coverage (or lack thereof) of the claim.

The Michigan court's holding in ATC would appear to severely restrict coverage for a most common method of computer fraud, and require, without specifically saying so in the policy, that coverage only exists if the fraudulent party reaches into an insured's account and removes the funds itself. But of course that's not how con artists work. You only have to remember the final scenes of "The Sting," where Doyle Lonnegan hands over his cash to bet on a sure thing. Had Lonnegan made his bet in Detroit rather than New York City, he would have lost a second time.

III.  Lessons Learned

Computer Fraud is a quickly changing problem, with scammers showing new methods of stealing, swindling or holding data hostage seemingly every month. The victims include television networks, hospitals, online retail providers and governments. In fact anyone using a computer network is susceptible, even the NSA.

Engaging your insurance brokers in a conversation about the types of fraud that appear in the news is the first step, but that is not enough. Understanding how Courts treat various insurance clauses must be taken into consideration as well.   Coverage should not be narrowly tailored to address last year's problem.   Rather, it should be negotiated to cover current scams, taking into account recent insurance decisions as well. Understanding how computer fraud coverage interacts with other types of cyber crime policies is also essential, because as these types of coverage mature the Courts can severely limit their application in the real world.

Finally, at the point of claim, businesses often get conflicting or incorrect advice concerning coverage. How claims are approached makes a big difference in whether they are ultimately covered or not, and an understanding of the law is critical to maximizing coverage. Getting a claim reviewed by experienced coverage counsel early in the process gives the insured an independent analysis taking into account the latest developments in coverage law, even those decisions that are not necessarily about the same types of coverage at issue but that can be critical in determining coverage.

Miller Friel, PLLC is a specialized insurance coverage law firm whose sole purpose is to help corporate clients maximize their insurance coverage. Our Focus of exclusively representing policyholders, combined with our extensive Experience in the area of insurance law, leads to greater efficiency, lower costs and better Results. Further discussion and analysis of insurance coverage issues impacting policyholders can be found in our Miller Friel Insurance Coverage Blog and our 7 Tips for Maximizing Coverage series.

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