Computer Fraud Losses Barred By “Authorized Representative” Exclusion

cyber-liability

PASADENA, June 28 — The Ninth Circuit U.S. Court of Appeals affirmed summary judgment for Great American Insurance Co., holding that the relevant policy’s “authorized representative” exclusion barred coverage of $100,000 in losses to Southern California Counseling Center  arising out of computer fraud by one of the Center’s payroll agencies.

The Southern California Counseling Center (SCCC) sued its insurer Great American Insurance Co. (GAIC) for breach of contract and bad faith, alleging  $100,000 in losses after a payroll company withdrew funds from SCCC’s bank accounts and used them instead of paying SCCC’s federal and state payroll tax obligations.  SCCC sought a declaratory judgment that Great American had a duty to cover the underlying losses arising out of computer fraud.

On June 17, 2014, U.S.District  Judge Audrey B. Collins granted summary judgment for Great American, holding that a policy provision excluding coverage for losses caused by “authorized representatives” applied to the misconduct of SCCC’s payroll services agent Ben Franklin Payroll Service .

The Ninth U.S. Circuit Court of appeals  affirmed the District Court’s ruling in favor of the insurer,  holding:

the plain meaning of the “authorized representative” language [here] . . . is not ambiguous and covers those who by authorization of the insured are given access to and permitted to handle the insured’s funds. . . This understanding comports with the function of the provision within the policy: to place the onus of vetting the individuals and entities whom the insured engages to stand in its shoes — and thus the risk of loss stemming from their conduct — squarely on the insured. In other words, the term ‘authorized representative’ is ‘a straightforward effort to embrace all statuses that are “authorized,” and thus are the insured’s responsibility to supervise…’”

“SCCC executed multiple agreements with Ben Franklin Payroll Service and/or its principal, Richard Zakarian, to allow the latter party or parties to provide payroll services…In doing so, SCCC gave them direct access to its bank account and permission to file tax documents on its behalf. These agreements used the word ‘authorize’ numerous times; indeed, it is difficult to imagine contracts that could more explicitly ‘authorize’ a ‘representative’ to act on one’s behalf. Under these circumstances, the district court did not err in concluding that the only reasonable construction of the term ‘authorized representative’ encompasses Ben Franklin Payroll Service and/or Zakarian, and, as a result, the exclusion unambiguously applies.”

Southern California Counseling Center v. Great Am. Ins. Co., (9th  Cir., 2016)

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Post-Litigation Claims Documents Not Discoverable, Court Rules

discovery

OAKLAND, May 31 – A California federal district magistrate has shielded from discovery  information in its insurer’s file generated after  the filing of coverage litigation.

Magma, a technology company,  sought coverage for underlying securities litigation from Genesis, which had written Magma’s excess  directors and officers insurers coverage.  Magma requested discovery of its excess insurer’s “claims handling information.” After Genesis provided information up to but not following the date of the coverage suit against it, Magma requested  the excess insurer’s file for the period following the beginning of the coverage litigation, including information about the excess insurer’s reinsurance and reserves.

Magma argued that Genesis’ duty of good faith and fair dealing continued even after coverage litigation commences, and on that basis argued the post litigation claims documents were discoverable .

White and the cases that followed it concerned whether an insured’s bad faith claim could be based on evidence of an insurer’s conduct during coverage litigation — but in all of those cases, the conduct at issue was already known to the insured. In Magma, by contrast, the insured technology company was seeking discovery of information unknown to it, contained within the excess insurer’s own internal files.

District Magistrate Howard R. Lloyd wrote that the possibility of post litigation bad faith conduct was not sufficient grounds to make the post-litigation information discoverable.  Lloyd called the company’s discovery request on that basis speculative, and without more, a “fishing expedition into the heart of the insurer’s litigation strategy. . . the insurer has an absolute right to defend against the insured’s claims, and opening up its litigation file to its insured would undermine its fair day in court.”

Judge Lloyd ruled, that the work product privilege of  Federal Rule of Civil Procedure 26(b)(3)(A) protected the information.

Genesis Insurance Company v. Magma Design Automation, Inc. No. 5:06-cv-05526, (N.D. Cal. May 31, 2016)

9th Circuit: Insured’s Contract, Bad Faith Claims Get The Gate

driveway-gate1

SAN FRANCISCO, Feb. 11 – The U.S. Court of Appeals for the Ninth Circuit has affirmed a district court’s dismissal of breach of contract and bad faith claims against Allstate, arising out of Allstate’s refusal to defend or indemnify its insured from a claim that the insureds committed trespass by destroying property.

In Zimmerman v. Allstate, Allstate’s insureds were sued by a homeowner’s association for trespassing upon and destroying a residential community gate.  The destruction was pre-meditated, according to the district court record.  After the insureds submitted the claim for defense and indemnity, Allstate denied the claim, and the insureds filed suit.  The district court entered summary judgment for Allstate, finding that the underlying complaint did not seek damages for an accidental occurrence, but rather for trespass, an intentional tort.

In affirming, the Ninth Circuit Court of Appeals found that the premeditated act of destruction of property committed by the insureds was neither “unexpected” nor “unintended,”  and therefore not an occurrence as defined in the policy.  The Court also affirmed dismissal of claims of breach of the duty of good faith and fair dealing.

Zimmerman v. Allstate, (9th Cir. Feb. 11, 2016)