Why it matters

Where the insured’s liability was clear and state law required the insured to make its client whole, the carrier could not later complain that the insured’s reimbursement to its client without the carrier’s written consent constituted an uncovered voluntary payment.

Policyholders should read this case as an exception to the general rule: Always involve your carrier at the earliest opportunity, particularly when considering paying money to resolve a claim. Otherwise, you can be sure that the carrier will contest coverage.

Detailed Discussion

On August 31, 2012, a wire transfer of $2,158,600 was made from a client’s account at First Commonwealth Bank in Pennsylvania to an account in Krasnodar, Russia. One problem: the client didn’t authorize the transfer, but was the victim of a malware attack that allowed an unknown third party to access the client’s computer systems.

Two more unauthorized wire transfers followed on September 4, with $76,520 wired to an account in Upper Darby, Pennsylvania, and a third transfer of $1,350,000 to a bank in Belarus. The bank didn’t realize the transfers were fraudulent until the afternoon of September 4.

The bank managed to recover only the amount transferred to the Pennsylvania account; the Belarus and Russia transfers were gone, leaving the client with a $3,508,600 loss. The client immediately demanded a refund or credit for the amounts, and the bank obliged on September 8, using its own funds.

First Commonwealth then sought its own recovery from insurer St. Paul Mercury Insurance Company. The insurer refused to provide coverage and the bank filed a declaratory judgment action.

The policy included a voluntary payments provision that prohibited the bank voluntarily making a payment without the carrier’s written consent. The insurer argued the bank breached the terms of this provision and forfeited coverage. The bank, in contrast, argued it was obligated by law to refund the monies and, further, that it had no valid defense to their client’s demands. Thus the refund had not been a “voluntary payment.” The court agreed.

Looking to Black’s Law Dictionary for a definition of "voluntary" as “[u]nconstrained by interference; not impelled by outside influence,” Judge Kelly said she could not find that the bank’s reimbursement was voluntary. “It is difficult for the Court to find that the mandate of 13 Pa. C.S.A. Section 4A204 [the law requiring the refund] is not an outside influence that interfered with the restrictions imposed upon Plaintiffs under the Policy,” she wrote.

The court denied St. Paul’s motion to dismiss the bank’s suit.

To read the opinion in First Commonwealth Bank v. St. Paul Mercury Insurance Co., click here.