Ninth Circuit's Fraudulent Payments Coverage Ruling Has Implications For Cyber Insurance Purchasers

• Published date: 04 February 2022
• Subject Matter: Insurance, Criminal Law, Insurance Laws and Products, White Collar Crime, Anti-Corruption & Fraud
• Law Firm: Cooley LLP
• Author: Ms Heidi Lawson and Paul T. Moura

In a decision with significant implications for policyholders seeking coverage for social engineering scams and cybercrime losses, the US Court of Appeals for the Ninth Circuit held in Ernst and Haas Management Company, Inc. v. Hiscox, Inc. that an insurance policy covering losses resulting directly from computer fraud included coverage for payments made based on a fraudulent invoice. The Ninth Circuit held that the loss was "directly" caused by the fraud, disagreeing with the insurer's argument that the unwitting employee who received the fraudulent invoice and sent the payment to the fraudster was an intervening actor.

Ernst and Haas Management Company was a victim of a common social engineering scam: A fraudster emailed an Ernst employee a fraudulent invoice, posing as that employee's superior. Believing the email to be legitimate, the employee directed Ernst's bank to wire $200,000 to a third-party account reflected in the fraudulent invoice. Afterward, the employee discovered that the superior did not actually send the fraudulent invoice. However, the $200,000 had already been transferred, and Ernst could not recover the funds.

Ernst's crime insurance policy contained two types of coverage common in many cyber and crime insurance policies: computer fraud coverage and funds transfer coverage. The computer fraud coverage insured loss "resulting directly from the use of any computer to fraudulently cause a transfer." The insurer denied coverage on the basis that the bank transfer did not result directly from computer fraud; rather, it resulted from the employee's subsequent instruction to the bank. The Ninth Circuit disagreed, following the US Court of Appeals for the Sixth Circuit's reasoning in Am. Tooling Center, Inc., v. Travelers Cas. & Sur. Co. of Am., 895 F.3d 455, 457...