On May 20, the Eight Circuit held that the State Bank of Bellingham was covered for losses following the criminal third party wire transfer of $485,000 from the bank to a foreign account. The money was stolen by hackers in 2011 after a bank employee inadvertently left one of three security measures disabled and computers running overnight.

The Bank was insured by BancInsure under a financial institution bond. BancInsure denied coverage based on exclusions for employee-caused loss, theft of confidential information, and mechanical breakdown/deterioration. The district court granted summary judgment to the bank finding that employee negligence, the taking of confidential passwords and the failure to update computer antivirus software were not the “efficient and proximate cause[s]” of the loss. Instead, the court found that the loss was attributable to computer systems fraud – i.e., the activity of a hacker – which was covered by the bond.

The Eighth Circuit affirmed on the grounds that the “overriding cause” of the loss was the criminal activity of a third party. “Even if the employees’ negligent actions ‘played an essential role’ in the loss and those actions created a risk of intrusion into [the bank’s] computer system by a malicious and larcenous virus, the intrusion and ensuing loss of bank funds was not ‘certain’ or ‘inevitable.’”

The decision is a reminder that insurers will often attempt to use exacting scrutiny to find a technical cause of a loss to support applying a coverage exclusion, even though it is actually the “overriding” or “efficient proximate” cause that matters. The decision also reinforces that employee negligence – even when “essential” to the security breach – may not preclude coverage if not the “overriding cause” or “effective and proximate cause” of a loss. This distinction can be particularly important for policyholders, who may have multiple policies implicated by a security breach (some which cover loss arising from employee negligence, others which may not). Skilled coverage counsel can help navigate the differences between and overlap of coverages to help policyholders position themselves for maximum recovery.