Hunton Insurance Recovery Blog

In a recent post, we discussed the Sixth Circuit’s holding in American Tooling Center, Inc. v. Travelers Casualty and Surety Co. of America, No. 17-2014, 2018 WL 3404708 (6th Cir. July 13, 2018), where the Sixth Circuit reversed the district court’s summary judgment for the insurer, finding coverage under its policy for a fraudulent scheme that resulted in a $834,000.00 loss. The insurer, Travelers, has now asked the Court to reconsider its decision.

On Friday, July 27, 2018, Travelers filed a petition for rehearing contending that the Sixth Circuit’s ruling was in direct conflict with the Court’s 2012 decision in Tooling, Mfg. & Technologies Ass’n v. Hartford Fire Ins. Co., 693 F.3d 665 (6th Cir. 2012).  Specifically, Travelers contends that the Sixth Circuit improperly applied a tort-based “proximate-cause” standard when determining whether the “directly caused by” or “directly resulting from” requirement in commercial crime policies was satisfied, contrary to Michigan law, which requires a “direct means direct” standard.

The Travelers policy provides coverage to any “direct loss” that was “directly caused by” the use of a computer.  As it did before, Travelers contends in its petition that its insured did not sustain a “direct loss” “directly caused” by computer fraud due to the a “chain of events” that occurred between the actual loss and the loss-inducing event.  But the Sixth Circuit Court addressed this very issue in its July 13^th decision, when it found that the loss occurred once the insured transferred the money in response to the fraudulent emails because this was the “point of no return.”

In addition, Travelers also includes an argument addressing the Court’s alleged failure to properly apply certain exclusions found within the policy.  Similar to Travelers’ main position detailed above, the Sixth Circuit previously rejected Travelers argument, and it appears as if Travelers is attempting to take a second bite at the apple.

Travelers is not the only carrier seeking to overturn an appellate Court’s ruling on the application of computer fraud coverage in social engineering scams. Federal Insurance Company has also filed a petition for rehearing after the Second Circuit affirmed a Southern District of New York Decision on July 6, 2018, in Medidata Solutions Inc. v. Federal Insurance Co., No. 17-2492 (2nd Cir. July 6, 2018), previously discussed on this blog, which found coverage under the policy at issue for a $5.8 million loss resulting from a spoofing scam.

One of the arguments rejected by the Second Circuit includes Federal’s contention that the loss was not a “direct loss” as a result of the spoofing attack, but rather it was what Federal characterizes as down-line attenuated events that led to the loss. Similar to the Sixth Circuit reasoning in American Tooling Center, Inc. the Second Circuit applied a proximate-cause analysis to find that the spoofing attack was a proximate cause of insured loss.  Counsel for Federal now relies on past judicial authority and the Court’s alleged misunderstanding of the scam itself in an attempt to alter the Court’s application of the policy provisions.

Both decisions, as well as the petitions that followed, expose the fluctuating coverage interpretations as they relate to these prevalent fraudulent schemes.  The uncertainty added by these decisions highlights the importance of precision in policy wording, as well as the need for policyholders to review their cyber and crime insurance policies to determine and fully understand the boundaries of risks covered by the policies and, when a loss occurs, employ experienced coverage counsel familiar with the nuanced differences that these coverages can present.