Saturday, September 5, 2020

Insurance Did Not Cover Cyber Fraud

A law firm that was the victim of a fraud did not have coverage under its liability insurance policy for the ensuing damage according to a decision of the Vermont Supreme Court.

A firm attorney had heard a CLE presentation by an insurance agent on cybersecurity and the firm then secured a policy from the speaker's company.

They alleged that they were covered for cyber fraud.

The insurer had warned of the dangers of wire fraud scams

In an August 2, 2016 email containing plaintiffs’ renewed policy for 2016-2017, defendants included a bulletin entitled, “Email Wire Fraud Scam Affecting Lawyers and Law Firms.” The four-page bulletin warned of the dangers of email wire fraud scams, provided tips for avoiding such scams, stated that coverage for losses resulting from such scams was not a given, and advised attorneys to discuss with their insurance agent coverage as to potential scenarios described in the email. There is no indication in the record that plaintiffs discussed with defendants their Hanover policy’s coverage with respect to potential wire fraud scams.

Then the law firm was victimized

On September 16, 2016, plaintiffs conducted a residential real estate closing, representing the buyers. At the closing, plaintiffs provided the sellers with a $100,744 check for the net proceeds of the sale. That same day, plaintiffs received an email purportedly from the sellers’ attorney stating that the sellers wanted the buyers to stop payment on the check and instead have the money wired to their bank in Texas. Plaintiffs complied with the request that same day. On September 25, 2016, the sellers’ attorney called plaintiffs to inform them that the sellers had not received the money. During the ensuing conversation, plaintiffs learned that the sellers’ attorney had never asked plaintiffs to send the money to a Texas bank. A subsequent investigation revealed that plaintiffs were the victim of a wire fraud scam. Plaintiffs sought coverage under the Hanover policy. Hanover initially denied coverage but eventually paid $50,000 as part of a settlement of the sellers’ lawsuit against plaintiffs.

The court found no basis for the coverage claim

We conclude, as a matter of law, that the circumstances in this case do not support plaintiffs’ VCPA [Vermont Consumers Protection Act] claim. At the CLE seminar, Garcia spoke about the importance of cybersecurity coverage. Finnegan approached Garcia after his talk expressing an interest in obtaining such coverage. Garcia explained to Finnegan that he would first need to review plaintiffs’ then-current policy, but he felt confident Smith Brothers could get plaintiffs better coverage in that regard. More than a month later, Finnegan completed an application on defendants’ website for professional liability insurance without specifically seeking cybersecurity coverage or referring to his conversation with Garcia or the CLE seminar. Plaintiffs were unable to provide documentation to support their claim that they sent their then-current policy to defendants before applying for insurance from them, and they have not disputed defendants’ assertion that defendants never received a copy of the policy before then. Defendants asked plaintiffs to review the Hanover policy and respond with any questions or concerns. Plaintiffs signed the policy without positing any questions or concerns regarding the coverage provided therein.

Given these circumstances, no reasonable factfinder could conclude that plaintiffs reasonably interpreted and relied upon Garcia’s representation that he was confident defendants could provide plaintiffs with better coverage once he had had an opportunity to review plaintiffs’ then-current policy. No reasonable factfinder could conclude that such specialized coverage would be supplied in the professional liability policy plaintiffs requested and acquired on defendants’ website over a month later without any mention of cybersecurity coverage and with no evidence that defendants had had an opportunity to review plaintiffs’ then-current policy. We reject plaintiffs’ argument that such a determination fails to give them the benefit of all reasonable doubts and inferences. Rather, our determination is based on the undisputed facts contained in the record.

(Mike Frisch)

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