The Law

Legal Spotlight

A look at the latest decisions impacting the industry.
By: | December 14, 2016

Social Engineering Claim Fails

In March 2013, an employee in Apache Corp.’s Scotland office received a telephone call informing the company of a changed bank account for Petrofac, a vendor. The Apache employee replied that a formal request on Petrofac letterhead was required.

A week later, Apache’s accounts payable department received an email from (the true website was with an attached letter related to the change of bank account. The email said the letter had been sent by mail as well.

The Apache employee called the phone number on the letter to confirm the request and subsequently, about $7 million was sent to the new bank account in payment of invoices. Within the month, Apache learned that it had been duped, and was able to retrieve “a substantial portion of the funds.” It did lose about $2.4 million, according to court documents.

Businessman Sitting In Front Of Computer Holding Calculator

It filed a claim with Great American Insurance Co. under the “computer fraud” provision of its crime-protection insurance policy, which had a $1 million deductible. The insurer denied the claim, stating the “loss did not result directly from the use of a computer nor did the use of a computer cause the transfer of funds.”

A Texas court ruled on behalf of Apache, after it had filed suit. The U.S. 5th Circuit Court of Appeals reversed that decision on Oct. 18.

“The email was part of the scheme; but, the email was merely incidental to the occurrence of the authorized transfer of money,” the court ruled, noting that “few — if any — fraudulent schemes would not involve some form of computer-facilitated communication.”

Scorecard: The insurance company did not have to cover the $2.4 million loss.

Takeaway: The decision will limit coverage for crime policy claims related to social-engineering scams.

‘Faulty Workmanship’ Dooms Claim

In December 2011, Kim’s Asia Construction removed the existing roof at Powerline Imports Inc. and installed a new one. Powerline said the new roof “leaks worse than before it was replaced,” according to court documents.

Additional repairs did not resolve the problem and eventually, Kim’s Asia Construction stopped responding to Powerline’s phone calls. Powerline engaged a new contractor to remove and dispose of the new roof, and filed suit against Kim’s in the Superior Court of Bergen County, N.J.

Kim’s sought defense and indemnification from State Farm Fire and Casualty Co., under its business liability insurance policy. The insurance company initially granted a defense but filed a lawsuit in the U.S. District Court for the Eastern District of Pennsylvania seeking a judgment that it owed neither defense nor indemnification.

That judgment was granted to State Farm on Oct. 5.

The court ruled that “faulty workmanship” is not considered an occurrence that would trigger a bodily injury or property damage claim.

“Under Pennsylvania law, such claims are not covered under the definition of ‘accident’ required to establish an ‘occurrence’ under the policy,” the court ruled.

Scorecard: The insurer does not have to defend the construction company in the lawsuit filed against it for “negligent construction” of a new roof.

Takeaway: The policy defined an occurrence as “an accident,” and the lawsuit did not allege “anything ‘unexpected,’ ‘unintentional,’ or ‘fortuitous’ about the damage to the roof.

Insurer Need Not Cover Thefts

John Clemmons was an estate lawyer who stole $1.3 million from his clients and gambled it away, according to reports. He was disbarred and sentenced to 18 years in prison.

The new administrator of two of the estates filed suit against Clemmons for misappropriating the funds and failing to account for the assets. It also claimed Clemmons failed to obtain adequate surety bonds as required by state law.
Hanover Insurance Co., which had issued a legal professional liability policy to Clemmons, sought a court declaration that it had no obligation to defend or indemnify Clemmons.

Businessman Being Arrested

The U.S. District Court in Nashville, Tenn., agreed with the insurer on Sept. 30.
The policy, the court ruled, excluded any claims caused by the “insured committing any intentional, dishonest, criminal, malicious or fraudulent act or omission.”

In addition, it said that the negligent failure to purchase surety bonds in the state’s mandated amounts were “outside the scope of coverage” of the policy, and that the claim was filed about a year after the claims-made policy lapsed.

The court also ruled that failure to obtain proper surety bonds “was not a ‘substantial factor in producing the damage or injury’ to the estates,” citing the attorney’s theft as the “substantial cause of the loss.”

Scorecard: The insurer does not have to defend or indemnify the incarcerated attorney for breach of fiduciary duty and misappropriation of funds.

Takeaway: The claims are outside the scope of coverage because the attorney “could have reasonably foreseen” the misappropriation claims against him and that Hanover would not have provided coverage for his thefts.

The late Anne Freedman is former managing editor of Risk & Insurance. Comments or questions about this article can be addressed to [email protected].

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