Is a counterfeit cashier’s check 'false pretenses'?

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Question: Our insured car dealer took a fake cashier’s check for the purchase of an automobile. He let the customer take the car. Ten days later, his bank called him and told him the cashier’s check was counterfeit.

My question is: Would the exclusion 2.(2) apply under the attached False Pretense form? I can’t find anything addressing fake checks. It seems to me, based on what I am reading in FC&S, the exclusion would apply because False Pretense coverage is not meant to protect an insured who does not practice sound business practices when taking checks. Thank you.

— Arkansas Subscriber

Answer: The answer to this question comes down to the nature of the cashier’s check, which is a check guaranteed by a bank, drawn on the bank’s own funds and signed by a cashier. Cashier’s checks are treated as guaranteed funds because the bank, rather than the purchaser, is responsible for paying the amount represented.

You mention in your question that the cashier’s check was counterfeit.

We believe that the endorsement would provide coverage for the loss because the fraudster caused the dealer to voluntarily part with the covered auto by tricking him into thinking the cashier’s check was authentic, and thus represented real money in the bank for which the bank was responsible.

We do not believe that exclusion 2. b. (2) would apply because of the counterfeit nature of the cashier’s check. Since the bank was never obligated to pay this cashier’s check, they cannot “fail to pay.” If the bank had validated a cashier’s check and then revoked that validation and not paid what was due to the dealer, that action would constitute a failure to pay.

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