Principle Solutions Group, LLC, an information technology company, lost $1.717 million when it became the victim of a fraud scheme for which it sought coverage under the terms of a commercial crime policy issued by Ironshore Indemnity, Inc. The policy provided coverage for “Computer and Funds Transfer Fraud,” “resulting directly from a fraudulent instruction directing a financial institution to debit your transfer account and transfer or, pay or deliver money or securities from that account.” At issue was the meaning of the word “directly,” as it pertained to the pending claim.

The fraudulent scheme involved two imposters. One of the imposters, posing as a managing director of Principle, sent an email that appeared to have been sent from the corporate email address directing the controller of the company to arrange a wire transfer to a bank in China in order to effectuate an urgent company acquisition. The email also instructed the controller to work with an attorney, a Mr. Leach, who was representing the company being acquired, to “ensure that the wire goes out today”. The person purporting to be Mr. Leach also emailed the controller sending wiring instructions to the bank in China, and then called the controller to emphasize that they needed to complete the wire transaction that day. The controller was not able to forward an email to the financial institution to wire the funds because it required more than an email to wire funds from an account. But after taking the necessary steps to effectuate an international wire transfer, including calling Mr. Leach to verify how Mr. Leach had received the wire instructions, the controller relayed this information to the financial institution, and the financial institution released the wire. Shortly after the wire transfer was made Principle learned of the fraud but unfortunately it was too late to recover the funds before they got into the hands of the parties perpetrating the fraud.

After Principle’s claim was presented, Ironshore denied the claim, arguing that the loss did not result “directly” from the “fraudulent instruction,” i.e., the fraudulent email directing the controller to wire the funds because: (1) additional information for the wire transfer was conveyed to Principle by Mr. Leach (the fictitious attorney) after the initial email, and (2) Principle’s employees set up and approved the wire transfer. Ironshore argued that these intervening acts removed the loss from a covered event because the wire transfer did not result “directly” from the “fraudulent instruction,” a required element of coverage. Principle, on the other hand, contended that the loss was the direct result of the covered act, the “fraudulent instruction,” and that the acts of its employees and others did not change that fact. After the claim was denied Principle filed suit for breach of contract and bad faith. Principle Solutions Group, LLC v. Ironshore Indemnity, Inc, 2016 WL 4618761 (N.D. Ga. 2016)

In the court’s August 30, 2016 decision ruling on plaintiff’s motion for partial summary judgment on the coverage question, the U.S. District Judge for the Northern District of Georgia granted the plaintiff’s motion finding that the policy language was ambiguous and it was reasonable for plaintiff to interpret the language of the policy to provide coverage even if there were intervening events between the fraud and the loss. The court further noted that because the insured could only act through its officers and employees, the policy provision would be rendered almost pointless and result in illusory coverage if some employee interaction between the fraud and the loss were sufficient to defeat coverage.

However, on Ironshore’s cross motion for summary judgment on plaintiff’s bad faith claim, the court found that the issue of liability in the case was “close” and it was not unreasonable or unfounded for Ironshore to deny coverage and to wait for the trial court to determine the coverage required by the contract. Accordingly, the district court dismissed plaintiff’s bad faith claim, even though it was found to have taken an incorrect position with respect to the coverage for plaintiff’s claim.

The Principle Solutions decision highlights how policy language can be tested in the face of the facts. Significantly, this decision is another instance where an insurer denied a claim based on its reasonable interpretation of the policy language, and was found by the court to NOT have acted in bad faith even though the court also concluded the insurer’s coverage decision, albeit a “close” call, was incorrect.