Fraud Coverage not Applicable to Transformation of Information
Q
A client's employee was tricked into disclosing their bank account information. The scheme was elaborate: First there was a phone call from a “bank employee” to alert the firm that they'd be receiving a fax request for some confidential information. Then the fax arrived, on what appeared to be bank letterhead, requesting information about the firm's account. The “bank's” fax number turned out to be bogus, however, and the next thing they knew, $120,000 had been taken from the firm's account. The bank won't accept responsibility for the loss because the withdrawal was made with an authentic account number and password.
To cover this hole in the future, we're recommending the purchase of Computer Fraud coverage (Insuring Agreement 6 of the Commercial Crime program), but the underwriter says it wouldn't cover this loss. He said there would be no coverage in this situation because the account information was “willfully given” by the insured. Although the term “fraudulent” isn't defined in the form, this situation certainly seems to fit the dictionary definition of that term. Moreover, if the information must be given unwillingly, it would seem that the coverage would be called Computer Extortion or Computer Robbery instead of Computer Fraud. What do you think?
Thanks again for your fine service to buyers and sellers of insurance.
Florida Subscriber
A
In reviewing the Commercial Crime Coverage Form CR 00 21 07 02, the Computer Fraud insuring agreement 6. does not provide coverage for the situation you present. It is not because the employee gave the information willingly, it is because the insuring agreement provides coverage for the transfer of money, securities or other property. In your loss it was not property that was transferred it was information; therefore, there is no coverage. The exclusion that addresses the willful giving of something is specific to a title to property or property itself. The bank account number is not title to property, or property itself, although it allows access to property.
The loss is also excluded under exclusion 4. as follows: Insuring agreement A.6 does not apply to: b. Funds Transfer Fraud – Loss resulting from a “fraudulent instruction” directing a financial institution to transfer, pay or deliver “funds” from your “transfer account”.
Having said that, there is coverage under insuring agreement 7. Funds Transfer Fraud. This provides coverage for the situation you present; the transfer of funds from the insured's account based on fraudulent instruction received by the financial institution. Once the thief obtained the account information from the employee, it appears that he then gave the bank instructions pretending to be the insured and authorized a transfer of funds to himself; this fits insuring agreement 7.
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