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By Andrew Delaney
Insurance coverage can be a tricky beast. Exclusions can be fluffier than an Arctic Fox’s fur coat. And sometimes, in all that confusion, the trial court might apply an exclusion that doesn’t fit.
That’s what happened in this case.
A Rainforest Chocolate, LLC (Rainforest) employee got an email from his manager. The email told the employee to pop roughly $20K into an outside account with an electronic-funds transfer. What the employee didn’t know is that what SCOV calls an “unknown individual” and we’ll call a “hacker” had hijacked the manager’s email account and sent the email.
An aside and a PSA: this type of scam is getting prevalent. Just last week at my office, someone took the time to learn that one of our of-counsel attorneys was likely not physically in the office and sent emails from an account purporting to be him to everyone in the office. Nobody was fooled and we all had a lot of fun asking for his credit card info so we could buy the requested Amazon gift cards, but it could have been a disaster. The hacker in this case was far more sophisticated and hijacked the manager’s actual account. Stay safe out there, kids, and pick up the phone to verify when you get weird, transfer-some-money-to-another-account emails.
At any rate, the Rainforest employee did as the email instructed. Rainforest caught on quickly, called the bank, and stopped the bleeding at just over $10K.
Sentinel covered Rainforest under a business-owner policy, so Rainforest reported the loss to Sentinel. In a series of letters, Rainforest noted provisions covering “losses due to Forgery, for Forged or Altered Instruments, and for losses resulting from Computer Fraud.” Sentinel denied coverage. Rainforest then “claimed coverage under a provision of the policy for the loss of Money or Securities by theft. Sentinel again denied coverage, primarily relying on an exclusion for physical loss or physical damage caused by or resulting from False Pretense that concerned ‘voluntary parting’ of the property—the False Pretense Exclusion.”
Things ended up in court, eventually leading to cross-motions for summary judgement. The trial court denied Rainforest’s motion and granted Sentinel’s motion. SCOV block-quotes the trial court and we will too:
The complicated nature of this policy, with its layers of coverages and exclusions, is almost impossible to follow without a compass and a guide. It took the court many hours of reading and rereading the policy and the briefs to reach a clear understanding of how the various provisions fit together. How any insured, however sophisticated, is supposed to determine that it is getting what it paid for with a policy like this is a mystery to the court. Nonetheless, the court concludes that the terms of the policy, while confusing, are not ambiguous and must be enforced as written.The trial court entered judgement for Sentinel. Rainforest appeals.
SCOV reviews summary judgment decisions de novo, using the same standard as the trial court. If you don’t know the standard for summary judgment by now, then you need to read a few older posts. It’s gotta be in 50% of the civil cases. But just in case you’ve been living under a rock: “Summary judgment is appropriate ‘if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.’”
No dispute over material facts here. We’re just dealing with interpreting an insurance policy. SCOV’s review is nondeferential and plenary. In plain English, that means SCOV gets to do whatever the heck it feels like in interpreting the policy. Terms are given their ordinary meanings, but any ambiguities are resolved in favor of coverage.
SCOV first looks at various provisions of the policy to suss out what is and isn’t covered. Long story short, the case boils down to “whether the False Pretense Exclusion bars coverage for the loss experienced by Rainforest.” The key here is that the exclusion applies only to “physical loss or physical damages” and, Rainforest argues, the loss here wasn’t a physical loss.
Turns out that in September 2018, the U.S. District Court for the District of Montana interpreted this exact provision in pretty much the same case. SCOV concludes the District Court’s reasoning is sound and runs with it. The only significant differences between our story and the Montana case are that the Montana case had more transfers and the claimant in the Montana case wasn’t able to catch the fraud quickly and stop the bleeding money wound.
The relevant provisions of the insurance policies are identical. The arguments are identical. And the claimant in the Montana case also argues that even though the claimant voluntarily parted with its money as contemplated by the False Pretense Exclusion (which excludes physical loss), electronic funds are intangible, and there’s no “physical loss.” Sentinel’s counter is that claimant lost control of money and it’s still a “physical” loss.
The District Court of Montana reasons that it would be reasonable to accept Sentinel’s it’s-basically-the-same-thing argument. Practically, losing money from a bank account has the same effect as losing cash. But the insurance policy itself seems to make a distinction between “loss or damage” and “physical loss or damage.” And the “physical” part becomes key. All of a sudden, the lost property has to be tangible rather than theoretical.
Thus, the Montana court concludes that it’s also reasonable to interpret the policy to find that the claimant didn’t suffer a physical loss. Boom. We’ve got ambiguity, and ambiguity means coverage.
SCOV agrees with the Montana District Court’s reasoning. The trial court here shouldn’t have found the False Pretenses exclusion unambiguous. Even though the trial court noted that electronic transfers might not be “physical,” it went with the rationale that funds qualified as “money” under the policy.
SCOV compares other provisions in the policy, concluding that fitting within the definition of “money” doesn’t make loss automatically “physical.” The Policy’s differing use of “loss or damage” and “physical loss or damage” without definition lends ambiguity in favor of coverage. Whether this was “sloppy drafting” or not, doesn’t matter—“sloppiness should not excuse an insurer from covering losses that a reasonable insured party would expect to be covered, based on a reasonable reading and interpretation of the policy language.”
SCOV points to the different interpretations of “physical loss” in various cases to illustrate the point (some for coverage, some against). Sounds ambiguous to us.
So, because SCOV is bound to interpret the ambiguity in favor of coverage, SCOV concludes that “the loss suffered was not physical, and thus coverage is not barred by the False Pretense Exclusion.”
Whether the loss is covered remains open to debate and SCOV kicks it back to the trial court to see if one of the potentially applicable coverages applies.
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