Credit Card Company and False Pretense Coverage

March 4, 2014

Insured is a used car dealer risk and has submitted a new report concerning credit card fraud in a car sale.  The car is identified as a 2009 Ford Fusion dealer owned vehicle for sale. The vehicle was sold to a customer for $13,900. The customer was out of state and this was an internet sale. There was use of a credit card to complete the sale. The sale was in 3 increments; $12,150 on 12/3/2013, $1350 and $450 on 12/18/2014. Cities Bank notified the insured on 1/14/2014 the card was fraudulently used. The buyer was from Boston and the card belonged to a woman from Florida. Funds paid to the insured were revoked.

The matter was reported to the local police who are investigating and allegedly trying to locate the vehicle. It has not been recovered.

Assumptions: insured has title to the vehicle; insured processed the payments without interruption; through ongoing police and bank investigation the vehicle has not been recovered; buyer actual identity is established.

Coverage forms: the insured has symbol 31 comprehensive coverage on garage form CA 00 05 03 06 with false pretense endorsement CA 25 03 03 06.

Question: does  CA 00 05 exclude the theft scheme? If excluded, does the CA25 03 provide coverage for credit card fraud in purchase scheme or theft of the vehicle?

Comment: I located an article outlining use and application of the endorsement; it indicates a bad check sale is not contemplated.  Is the fraudulent credit card use also seen as business risk, and therefore not a covered circumstance or occurrence?

Ohio Subscriber

The only exclusion in the endorsement that might apply is the one that states false pretense coverage does not apply to a loss in which for any reason a bank or any other drawee fails to pay.

So, the question is: does a credit card company equal a drawee. A drawee is defined in the law dictionary as a person or entity to whom a check or draft is directed and who is requested to pay the amount of money therein mentioned. Now as we see it, a bank or some other drawee is an entity holding money belonging to the writer (usually a customer) of the check and if the money is there, the bank will turn over the money to whoever presents the check. A credit card company is not really holding the customer's money—it is lending the money to the customer and expects the customer to pay it back (with interest). The bank customer (check writer) is not going to pay the bank back because the money belongs to the customer.

So, we are of the opinion that a credit card company is not a drawee and the exclusion on the false pretense endorsement is not going to apply. The insured would have coverage for the loss of the car since it was lost due to false pretense.

You may want to check with an attorney who is familiar with the law in your area to see if a credit card company is seen by the courts there as a drawee. If not, there is coverage for this loss; if yes, then the exclusion applies and there is no coverage.

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