Your company’s controller receives an email instruction from your CEO to wire funds to complete a time-sensitive and confidential deal–seems like a clear directive to execute, but it’s not. It’s an increasingly common scam known as the “Business E-mail Compromise” (BEC).

In a BEC scam, as we previously described, fraudsters send spoofed e-mail to trick employees into making unauthorized transfers of funds, generally through wire transfers. The employee, usually a controller or other individual responsible for wiring money, receives an e-mail which appears to be from a high-level company executive, company lawyer or advisor, or even a trusted long-standing supplier or vendor. The e-mail pressures the employee to transfer company funds to a bank account, often offshore, urgently and secretly. The scammers may attempt to add credibility by sending the targeted employee spoofed e-mails from multiple trusted accounts or by plying the employee with fraudulent telephone calls, websites, and documents on formal letterhead. As discussed by our White Collar defense colleagues, victims of the BEC scam have reported to the FBI and international law enforcement agencies over $1.2 billion in exposed losses, much of which occurred in 2015 alone. While being victimized by a BEC scam can be costly, some of these losses may be covered by insurance.

For example, earlier this year on January 4, 2016, manufacturer AFGlobal Corporation of Houston, Texas, sued its insurer, Chubb, in Harris County, Texas, in connection with its loss of $480,000 to a typical BEC scam in May 2014. AFGlobal’s Director of Accounting received email purporting to be from the company’s CEO. The email instructed the director to cooperate with a named attorney to handle a highly confidential financial operation. The director then received follow-up telephone and e-mail communications from the purported attorney, who explained that the director should immediately wire $480,000 to a Chinese bank account to pay the due diligence fees related to a sensitive acquisition in China that AFGlobal was pursuing, according to the “attorney.” A week after the director transferred the funds, he received another e-mail from the CEO’s account requesting a second transfer in the amount of $18 million. The director became suspicious and notified his supervisors, who determined the company had been scammed. AFGlobal’s bank could not recover the transferred $480,000 from China.

AFGlobal promptly tendered notice to its crime policy insurer and filed a proof of loss, seeking reimbursement for the loss of its own funds under several insuring agreements, including forgery coverage, computer fraud coverage, and funds transfer fraud coverage. The insurer denied coverage, arguing that none of the insuring agreements applied to the BEC scam. The insurer claimed that the forgery coverage was not triggered because there was no forgery of a financial instrument as required by the provision. The insurer also argued that the computer fraud coverage was not implicated because the loss was not caused by hacking into a computer. Finally the insurer contended that the funds transfer fraud coverage was inapplicable because the wire transfer instructions were issued to the bank by AFGlobal itself rather than by a fraudster claiming to be AFGlobal.

The scam on AFGlobal was similar to the one suffered by Medidata Solutions, on which we reported last September. Medidata, which unfortunately lost $4.8 million to the BEC scam, has also sued its insurer, Chubb, for coverage under the computer fraud part of its crime policy.

Courts have started to address issues related to potential insurance coverage of BEC scams. For example, a Connecticut state judge determined that there could be coverage for a BEC scam under the computer fraud insuring agreement of a crime insurance policy in Owens, Schine & Nicola, P.C. v. Travelers Cas. & Sur. Co. of Am. (Conn. Sup. Ct. 2010). In that case, a fraudster sent a Connecticut law firm a spoofed e-mail purporting to be from a North Carolina attorney looking to refer a client for a debt collection in China. The potential “client” then e-mailed the law firm, which accepted the representation. Subsequently, the fraudster “client” e-mailed the law firm that its debtor had agreed to send the owed funds to the firm’s office. When a bank check arrived, the law firm deposited it into its client IOLTA account and, pursuant to the “client’s” e-mailed instructions, had its bank wire the funds to the “client’s” account in South Korea. The bank check was, of course, fraudulent and the law firm’s IOLTA account ended up almost $200,000 in the red.

In the law firm’s suit against its insurer for indemnification for the loss of its clients’ funds, the judge concluded that there was a sufficient amount of computer usage to constitute computer fraud, rejecting the insurer’s argument that policy only covered hacking-style schemes in which the transfer of money occurs in the computer itself. The judge also ruled that the BEC scam directly caused the loss under Connecticut’s proximate cause standard, despite the insurer’s contention that the loss was directly caused by the law firm’s decision to wire the money to South Korea rather than by the fraudulent e-mails. (The parties later stipulated to vacate this decision.)

A California federal judge, on the other hand, found no coverage for a BEC scam under a policy’s forgery coverage, computer fraud coverage, and funds transfer fraud coverage provisions in Taylor & Lieberman v. Federal Insurance Co. (C.D. Cal. 2015). There, a scammer spoofed the e-mail account of an accounting firm’s client. Purporting to be the client, the scammer sent e-mails to the accounting firm requesting that the firm wire money from the client’s account, over which the firm had power of attorney, to an account in Malaysia. By the time the firm discovered the scheme, it had lost almost $100,000 of its client’s money. The judge disposed of the accounting firm’s subsequent coverage lawsuit on the grounds that none of the provisions covered third-party losses.

Despite insurers’ attempts to avoid paying out for BEC scam losses under existing policies, a few insurers have begun marketing endorsements that would ostensibly provide additional coverage for these losses under the rubric of “social engineering fraud.” The endorsements promise coverage for executive impersonation, client impersonation (one of them even describes the scenario in the Connecticut Owens case, where an attorney collected a check for a client and issued a wire transfer to the client, only to discover that the check was fraudulent), and impersonation of a trusted third party such as a vendor or supplier. One of the insurers extends coverage even where the fraud did not involve a computer, email, or telephone.

Notably, the low limits the insurers advertise for these new endorsements may not satisfy many policyholders. The above cases illustrate that a company can quickly lose hundreds of thousands or even millions of dollars to a BEC scam. A company seeking to protect itself with this type of endorsement should ensure that the coverage limit is commensurate with the risk. Regardless, these endorsements are worth examining for whether they would provide additional risk abatement in a business environment of more frequent and varied computer fraud schemes.