Minnesota: Insurance Coverage for Fraudulent Bank Transfer

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MINNESOTA, May 20 –  The U.S. Court of Appeals for the Eighth Circuit Court has ruled that the State Bank of Bellingham was covered for losses caused by an unauthorized wire transfer by hackers.  The Bank sough coverage under a financial institution bond underwritten by BancInsure, Inc. for a transfer of nearly $500,000.00 to  a foreign bank account.  The bond is treated as an insurance policy under Minnesota state law.

According to the opinion, the unauthorized transfer occurred when a bank employee, using an electronic token, password, and passphrase as well as those of another bank employee, executed an authorized wire transfer but left the tokens “open” on an operating computer following completion of the transaction. The following day, two unauthorized transfers were discovered, only one of which the Bank was able to reverse. A forensic investigation of the breach  revealed that a computer virus created a breach in access which permitted the fraudulent transfers.

A federal district court ruled that the computer fraud was the legal cause of the loss, not the bank employees’ breach of bank policies and practices regarding the use of confidential passwords, or failure to update antivirus software. The appeals court affirmed the ruling in favor of coverage, and held that while other possible factors may have “played an essential role” in the loss, they  did not make the unauthorized transfers “certain” or “inevitable” such that there would be no coverage under the bond.

State Bank v. BancInsure, Inc., 2016 U.S. App. LEXIS 9235 (8th Cir. Minn. May 20, 2016)

Portion of P.F. Changs’s Cyber Losses Not Covered By Chubb Policy

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PHOENIX, June 1 – According to an article published last week on businessinsurance.com written by Judy Greenwald, a federal court in Arizona has held hat Chubb Ltd. does not have to reimburse P.F. Chang’s for costs related to  a 2014 data breach under its cyber policy.

Federal Insurance Co., a unit of  Chubb Ltd. unit sold a Cybersecurity policy P.F. Chang’s China Bistro Inc. parent corporation, effective Jan. 1, 2014, to Jan. 1, 2015.  The policy was sold and represented as coverage for “direct loss, legal liability, and consequential loss resulting from cyber security breaches,” according to the opinion, authored by District Judge Stephen M. McNamee.

Chang’s entered into a contract  with Bank of America Merchant Services L.L.C. to process credit card payments made by Chang’s customers.  On June 10, 2014, Chang’s learned that computer hackers had obtained and disclosed 60,000 customer credit card numbers.

Federal had already paid Chang’s more than $1.7 million for breach related costs.

Bank of America separately sought nearly $2 million in costs arising from the breach from Chang’s, which Change’s reimbursed.  Federal, however, denied Change’s request for coverage  of this third party reimbursement, after which Chang’s filed suit.

Judge McNamee agreed with Federal that policy language requiring Federal to pay Chang for losses related to privacy injuries was inapplicable to the B of A claim, holding that the bank’s records were not themselves compromised by the breach.  The judge wrote, “The court agrees with Federal; (Bank of America) did not sustain a privacy Injury itself, and therefore cannot maintain a valid claim for injury against Chang’s.  The judge granted  Chubb’s motion for summary judgment in part on that basis.

P.F. Chang’s China Bistro, Inc. v. Fed. Ins. Co., 2016 U.S. Dist. LEXIS 70749 (D. Ariz. May 26, 2016)

Georgia: Lead Paint Claims Barred by CGL Pollution Exclusion

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GEORGIA, May 26 – The Georgia Supreme Court has ruled that a CGL policy pollution exclusion bars coverage for claims against the insured landlord for injuries resulting from  lead paint ingestion.

In Georgia Farm Bureau Mut. Ins. Co. v. Smith, 784 S.E.2d 422 (Ga. 2016) the insurer sought a declaratory judgment that it did not owe defense or indemnity to its insured landlord in an underlying suit against the landlord by a tenant who claims she sustained as a result of ingesting lead paint in a rental home.   Georgia Farm Bureau relied on an absolute pollution exclusion in the policy.  The exclusion by its terms did not cover injury “arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of ‘pollutants.’”  The policy defined “pollutants” as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.”

The insurer won summary judgment on the exclusion at the trial court level, the court holding that lead-based paint was unambiguously a “pollutant” as defined in the policy.  An appeals court reversed, observing a split in jurisdictions, noting that some jurisdictions applied the exclusion only in instances of “industrial pollution.” The insurer appealed.

The Georgia Supreme Court reversed, finding that the absolute pollution exclusion applied from injury arising from exposure to lead-based paint.

Georgia Farm Bureau Ins. v. Smith et. al., 784 S.E.2d 422 (Ga. 2016)

Michigan: Apartment Fire Smoke Not Pollutant In CGL Policy

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MICHICAN, May 31 –  The Michigan Supreme Court refused to address or overturn a lower court’s determination that smoke from an apartment complex fire doesn’t constitute a pollutant within the meaning of a pollution exclusion in a commercial general liability policy.  The effect of the ruling leaves a judgment against XL Insurance in place.

Plaintiffs Charlie and Mary Hobson sued apartment owners as well as XL after sustaining injuries in an apartment fire. The Hobsons claimed that XL wrongfully denied insurance coverage to the apartment entities.  XL had sought a ruling that smoke related injuries, including smoke inhalation arising out of an apartment fire,  constituted excluded pollution related losses within the meaning of the landlord’s CGL policy.   The Hobson’s responded that smoke related losses were a component of the fire,  clearly contemplated by the CGL coverage, and were not within the pollution exclusion.   The trial court denied the insurer’s motion for summary disposition and a three-judge panel of an intermediate appeals court affirmed.

The state supreme per Justice Brian Zahra court declined to hear the matter:

“[W]hile this case presents an interesting question of contract interpretation, because the record is undeveloped with regard to what constitutes a discharge, dispersal, seepage, migration, release, or escape [of pollutants] under the endorsement, I agree with my colleagues that leave should be denied.”

Charlie B. Hobson et al. v. Indian Harbor Insurance Co. et al.(Mich 2016, case number 151447).  A link to the prior Court of Appeals opinion can be found here.

 

Nationwide Properly Withdrew Defense of Pollution Claim, 3rd Circuit Rules

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PHILADELPHIA, May 27  — The Third Circuit last week ruled that  Nationwide Insurance properly terminated its defense of a group of insured homeowners, finding that it had properly reserved its rights to do so.

Randy and Erin Shearer sued a group of homeowners, claiming that the owners permitted sewage to leak onto the Shearer’s property, an 18 acre parcel of land they intended to develop.  Nationwide defended the homeowners under a reservation of rights, and eventually cancelled coverage and withdrew its defense.

The insurer issued several reservation communications to its insureds, stating that  coverage was subject to a reservation of rights,  and pointing out pollution exclusions in the policy, and exclusions for biological deterioration.

Nationwide filed suit in 2014 claiming it owed the homeowners no defense, citing the pollution exclusion. The homeowners did not contest the exclusion, but rather claimed prejudice from Nationwide’s decision to terminate their defense.  The U.S. District Court  for the Eastern District of Pa. found in favor of Nationwide, ruling that the reservation of rights letters entitled Nationwide to withdraw its defense.

In affirming the district court, Circuit Judge Thomas Hardiman wrote:

“While they were understandably disappointed by Nationwide’s decision to withdraw its defense, the fact that it was entitled to do so under the terms of the insurance contracts means that the defense it did tender was a temporary benefit to the policyholders. . . The fact that Nationwide defended the case for some time before citing an exclusion and denying coverage does not somehow turn the defense it did provide into fraudulent inducement. . . Nor does it turn the policyholders’ decision to allow Nationwide to provide them with a defense into detrimental reliance.”

Nationwide Insurance Company v. Shearer, et. al., (3rd Circuit, 2016)(Hardiman, J.)

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