Hunton Insurance Recovery Blog

Last week, the Fifth Circuit affirmed that a title company’s crime protection policy applies to cover loss from a fraudulent wire transfer. The insurer, RLI Insurance Company (RLI), had argued that the $250,945.31 transfer was not covered under the funds transfer fraud endorsement because the instruction that led to the transfer was authorized and approved by the insured, Valero Title Inc. (Valero). Specifically, a Valero employee instructed Valero’s bank to wire the funds to a fraudulent account after a fraudster posing as a lender’s employee intercepted email communications regarding a payoff transaction and deceptively instructed the transfer.

The Insurance Coverage Law Center has published an article in which Hunton insurance recovery partner, Michael Levine, exposes evidence of insurance company sins unearthed in the COVID-19 business interruption insurance litigation battleground.  The article discusses evidence obtained from four of the largest property and business income insurers, which tends to prove that long before COVID-19, each understood virus and communicable disease to pose a risk of physical loss or damage sufficient to trigger coverage under their respective all-risk insurance products.  A copy of ...

Hunton Andrews Kurth's insurance coverage team recently published a client alert discussing a D&O coverage dispute arising from a credit union’s post-acquisition fraud claims.

Everest National Insurance Company has filed a lawsuit denying any obligation to cover a post-acquisition lawsuit by a credit union alleging fraud against two banks and their executives. The seller paid additional premium for an extended reporting period to report claims based on pre-acquisition wrongful conduct, but the insurer denied coverage on the ground that any claims asserted by the buyer are excluded under the D&O policy’s “insured vs. insured” exclusion. The decision underscores the importance of not only ensuring continuity of D&O coverage before and after a transaction but also evaluating all possible claim scenarios arising out of a deal to ensure that all stakeholders are adequately protected.

On March 3, 2021, the Delaware Supreme Court issued a landmark decision holding that Delaware law should be applied in disputes over directors and officers liability (“D&O”) insurance policies sold to companies incorporated in Delaware. RSUI Indem. Co. v. Murdock, et al. No. 154, 2020, C.A. No. N16C-01-104 CCLD (Del. Mar. 3, 2021). The court addressed this and other key issues in the long-running dispute over D&O insurance purchased by Dole Food Company, specifically addressing issues raised by Dole’s eighth-layer excess insurer, RSUI, which provided $10 million coverage excess of $75 million.

The court decided multiple important issues, finding that liability for alleged fraud is insurable under Delaware public policy, RSUI’s Profit/Fraud Exclusion did not bar coverage because there had been no “final adjudication” of fraud, and the “larger sums rule” governed allocation issues. However, among these important rulings, the most significant may be the Supreme Court’s ruling that Delaware governs the interpretation of D&O insurance issued to a company incorporated in Delaware.  The court specifically rejected the insurer’s arguments that California law (which might preclude coverage) should apply under a policy that was purchased and issued in California to a Delaware corporation headquartered in California.

It’s a cautionary tale of cyber fraud.  A title agent in a real estate transaction receives an email ostensibly from the mortgage lender providing instructions for transferring the loan proceeds into a settlement bank account.  After transferring the funds ($520,000), it becomes apparent that the transfer instructions came from an email address that was one letter off from the mortgage lender’s actual email address – it was a scam.  But it’s too late, the scammer has already withdrawn the funds from the settlement account and cannot be traced.

A hotel operator defeated an insurer’s motion to dismiss its suit alleging that the insurer wrongfully denied coverage and acted in bad faith by denying the hotel’s $1.9 million claim arising from an employee’s fraudulent scheme diverting commissions to fictitious travel agencies. The court held that the hotel operator had suffered an “insurable loss” and rejected the insurer’s argument that the claim was barred under the policy’s suit limitations provision.

A Michigan federal court held recently in Great American Fidelity Ins. Co. v. Stout Risius Ross, Inc., et al., 2020 WL 601784, at *1 (E.D. Mich. Feb. 7, 2020), that an insurer must defend an investment advisor against lawsuits alleging that it fraudulently overvalued the stock of a company destined for bankruptcy.  The court determined that the insurer failed to show that an exclusion barring coverage for claims arising out of ERISA and other securities laws violations was broad enough to bar coverage for accompanying common law claims of fraud and negligent misrepresentation.

Following a bench trial, the United States District Court for the Eastern District of Virginia found in The Cincinnati Insurance Co. v. The Norfolk Truck Center that a commercial truck dealer’s social engineering loss arose directly from a computer, thereby triggering the dealer’s computer fraud coverage, notwithstanding that the scheme involved numerous non-computer acts in the causal chain of events.  A copy of the decision may be found here.

Real estate investment trust VERIET, Inc. (formerly known as American Realty Capital Properties) announced this week that it agreed to a $765.5 million settlement to resolve shareholder class action and related lawsuits arising from a host of alleged securities violations and accounting fraud at ARCP since the company went public in 2011. Defendants in the class action settlement have agreed to pay more than $1 billion in compensation, including millions from ARCP’s former manager and principals, chief financial officer, and former auditor.

The Sixth Circuit has rejected Travelers Casualty & Surety Company’s request for reconsideration of the court’s July 13, 2018 decision, confirming that the insured’s transfer of more than $800,000 to a fraudster after receipt of spoofed e-mails was a direct loss" that was "directly caused by" the use of a computer under the terms of ATC’s crime policy.  In doing so, the court likewise confirmed that intervening steps by the insured, such as following the directions contained in the bogus e-mails, did not break the causal chain so as to defeat coverage for “direct” losses.

Hunton insurance recovery partner, Syed Ahmad, was recently asked to comment by Law360 on a Delaware Superior Court decision finding that state law does not preclude D&O insurance coverage for fraud-based claims against two Dole Food Co. executives, who are seeking to force several excess insurers to help pay for $222 million in settlements they reached to resolve stockholder suits accusing them of driving down Dole’s price before a 2013 take-private deal.  According the Ahmad, the ruling is likely to carry strong precedential effect due to the solid reasoning of the court’s decision, which is premised on the Delaware Supreme Court’s 1986 decision in Whalen v. On-Deck Inc., which upheld the availability of coverage for punitive damages under Delaware law.

This week, SEC Chairman Jay Clayton issued a statement on Initial Coin Offerings (ICO) addressing the legality, fairness, and risks associated with those offerings. Although the agency’s bulletin was one of many recent public statements by federal agencies on ICOs and cryptocurrencies generally, this new warning highlights additional issues and concerns with the ICO phenomenon that are particularly relevant to insurance coverage.

A federal judge in Georgia held last week that a Commercial Crime Policy must cover a $1.7 million wire-transfer of funds precipitated by a fraudulent e-mail, purportedly authored by one of the insured's managing directors. The decision marks yet another attempt by insurers to improperly narrow the scope of coverage afforded for cyber and technology-related losses.