The 9th Circuit Court of Appeals overturned a Los Angeles federal judge's decision to dismiss Ernst and Hass Management's lawsuit against specialty insurer Hiscox Inc. The lower court determined that the losses were not "directly" caused by fraud, as required by the insurance policy, but rather by the "intervening acts" of the duped employee who authorized the wire transfers.
"That reasoning — that this fraud became 'authorized' precisely when it succeeded — cannot be the correct reading" of the insurance policy, wrote Circuit Judge Lawrence VanDyke in a first-of-its-kind case for the circuit.
VanDyke went on to say, "There was no intervening event." Instead, the employee "directly" caused the loss of funds by acting in accordance with the fraudulent instruction. VanDyke was joined in court by Circuit Judge Ryan Nelson and U.S. District Judge Karen Schreier of South Dakota, who were both sitting by designation.
Ernst's lawyers at Bastian & Dini did not respond immediately to requests for comment.
Hiscox's lead counsel, Joseph Oliva of Goldberg Segalla, did not respond immediately.
According to the 9th Circuit, in March 2019, an accounts payable clerk at Ernst received three emails from an imposter posing as her boss. The emails told her to wire $50,000, $150,000, and $470,000 to Zang Investments, respectively.
The clerk authorized the first two payments before calling her boss to confirm the third.
After its claims were denied, Ernst filed a $200,000 claim with Hiscox under the "computer fraud" and "funds transfer fraud" provisions of its commercial crime policy, and sued the insurer for damages, unfair trade practices, and bad faith.
The parties couldn't agree on whether the terms of Ernst and Haas' original policy from 2012 or the more stringent terms of its most recent update in 2019 applied. Without ruling, U.S. District Judge Andre Birotte assumed that the 2012 policy applied, but agreed with Hiscox that it did not cover losses from duly authorized "albeit unwitting" wire transfers.
The 9th Circuit determined that if the facts alleged were true, the loss would be covered by the 2012 policy. It declined to comment on coverage under the 2019 policy, remanding the case to Birotte to consider that question as well as Hiscox's other potential defenses.