Email Fraud Scheme Covered Under Business Owner’s Policy
Advertising Design Inc. (AD Design) employees paid out four transactions totaling $115,595 before realizing they were part of an email scheme devised by spear phishers to swindle money out of the company.
Operations manager April Logulo was purportedly sent emails from Ad Design’s president Eric Finstad with the request to make electronic payments to a designated bank account. Logulo was under the impression that these emails were legitimate requests to satisfy the company’s vendors.
When Ad Design realized what was happening, they quickly filed a claim with Sentinel Insurance Company, which issued a business owner’s policy to the company during the time of the scheme.
Sentinel denied the claim, stating the policy excluded coverage under a false pretense exclusion. It argued the scammed money was a physical loss to the company, and the false pretense exclusion was specifically for limited physical losses.
Ad Design took Sentinel to court.
In its argument, Ad Design asserted the money taken from its bank was not a physical loss but was actually covered under the Monies and Securities, Forgery and Computer Fraud Coverages in the policy. The ad company added that while the policy said Sentinel should be obligated for recovery up to $80,000, Ad Design believed it was entitled to the full $115,595, because Sentinel breached its contract by not paying outright.
Sentinel countered the money was indeed a physical loss for the company, which Ad Design voluntarily departed with through the fraud scheme.
In the policy, Sentinel noted, the false pretense exclusion barred coverage for physical loss resulting from “[v]oluntary parting with any property by [the company] if induced to do so by any fraudulent scheme, trick, device or false pretense.”
But upon further inspection of the policy, the court found two additional sections afforded coverage for the loss, while a third coverage part, which expressly required that the loss be “physical loss,” didn’t even apply.
Scorecard: Ad Design will receive reimbursement for the money it lost through a fraudulent email scheme. That amount will be determined through further court hearings.
Takeaway: When creating a policy, be sure to review any language that may contradict and overwrite already written-in exclusions. &