Forged checks, gold coins and invalid payment exclusions
At hand in the case was the theft of gold coins worth more than $1 million in which fraudulent checks were used to scam a dealer.
A pro-insurer ruling was handed down by the Texas Supreme Court in a case regarding coverage for stolen gold coins worth more than $1 million and a coin dealer who was swindled with fraudulent checks used by an identity thief. The case is Dillon Gage Inc. v. Certain Underwriters at Lloyds Subscribing to Policy No. EE1701590,
The Texas high court was handed two certified questions by a federal appeals court. In answering those questions, the court said that the policy wording should be interpreted to mean that an exclusion and a sublimit applied and that the alleged negligence of the third party that shipped the goods did not allow for an additional claim.
In 2018, Dillon Gage Inc., a gold coin and precious metal dealer, sold $549,000 worth of gold coins to a thief posing as a person called Kenneth Bramlett. The thief paid with a stolen check and forged Bramlett’s wife’s signature. The check provisionally cleared, and Dillon Gage shipped the coins to Bramlett’s home address, but it sent the tracking information to the thief’s email address. After UPS retrieved the package from Dillon Gage, the thief entered the shipment tracking information into UPS’s online system and rerouted the shipment. The thief requested that UPS hold the coins at a facility for pickup. Dillon Gage claims that it instructed UPS to not reroute shipments without Dillon Gage’s consent.
Someone other than the Bramletts picked the coins up from UPS. That same day, the thief placed a second order for $655,000 worth of gold coins, paid with a fraudulent check and intercepted the shipment in the same manner as the first shipment. The Bramletts discovered and reported the identity theft and check fraud. Their bank dishonored the fraudulent checks, costing Dillion Gage $1.2 million
Dillon Gage filed a claim with certain underwriters at Lloyds, seeking to recover $1.18 million for the value of the coins. The policy provided coverage for the “physical loss” of insured property “whilst being shipped via portal or courier transit.”
The policy included an “invalid payments exclusion clause,” which limits liability for property losses “consequent upon” handing the insured property over “to any third party” against payment by fraudulent check. Based on this exclusion, the insurer denied coverage for all but $12,500 for property losses “consequent upon” the fraud.
Dillon Gage argued that the proximate cause of the loss was the theft of the packages, not the fraudulent checks. The underwriters argued that the limits available were restricted because the dealer would not have shipped the coins but for the payments, so the loss was “consequent upon” the fraud.
Dillon Gage then argued that UPS’ alleged negligence was a separate cause of loss and therefore the exclusion did not apply.
In the first ruling, the U.S. District Court for the Northern District in Dallas characterized the case as “a combination of the works of Auric Goldfinger and Frank Abagnale,” and granted summary judgment in favor of the insurers on the issue of the “consequent upon” wording. The court also ruled that the alleged negligence by UPS was not an independent cause of loss.
Dillon Gage appealed to the 5th Circuit, which sought a ruling from the Texas Supreme Court on the meaning of the wording and whether the negligence was an independent cause of loss. The high court found Dillon Gage’s response to be unreasonable, noting that “[t]he ordinary meaning of ‘consequent upon’ is ‘following as a result or effect.’”
The court found that UPS did not allow the thief to reroute the packages, instead, the thief induced the shipping company’s negligence.
Insurance Coverage Law Center editor’s note: The idea of “but for” is an important concept in insurance policy interpretation. While Gage thinks UPS’ action was a separate cause of loss, “but for” the fraudulent checks, UPS never would have had coins to ship. The cause of loss in this case is the fraudulent checks being used to deceive the seller into parting with the property. The idea of “but for” is a useful concept when looking at causes of loss; if something would not have happened “but for” a particular action, then that action is likely to be your cause of loss.
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