In its recent decision in Universal American Corp. v. National Union Fire Ins. Co. of Pittsburg, PA, 2013 N.Y. App. Div. LEXIS 6278 (N.Y. 1st Dep’t Oct. 1, 2013), the New York Appellate Division, First Department, had occasion to consider the scope of coverage afforded under a computer systems fraud endorsement to a financial institution bond.

National Union’s insured, Universal, is a health insurance company that offers a number of products, including Medicare Advantage Private Fee-For-Service (MA-PFFS) plans, which are government-regulated alternatives to Medicare. Universal processes payments for medical services received by MA-PFFS plan members through its computer system on which medical service providers enter claim information directly.  Payments are thereafter made by Universal without manual review.

National Union issued a financial institution bond to Universal with a rider titled “Computer Systems Fraud,” which provides indemnification for:

Loss resulting directly from a fraudulent

  1. entry of Electronic Data or Computer Program into, or
  2. change of Electronic Data or Computer Program within the Insured's proprietary Computer System...provided that the entry or change causes
    1. Property to be transferred, paid or delivered
    2. an account of the Insured, or of its customer, to be added, deleted, debited or credited, or
    3. an unauthorized account or a fictitious account to be debited or credited.

Universal claimed to have suffered some $18 million in losses from fraudulent claims made by providers a variety of different schemes.  Universal claimed that some 80% of the losses it experienced resulted from claims submitted through its computer system, i.e., where providers entered false information onto Universal’s billing system, and that these losses should be indemnified pursuant to the Computer Systems Fraud coverage.

On motion for summary judgment at the trial court level, Universal argued that the rider extended coverage to any loss resulting from the fraudulent entry of electronic data into its own computer system, regardless of whether the provider entering the claim data was authorizes to access the system.  National Union, on the other hand, argued that the rider extended coverage only to unauthorized use of Universal’s computer system, i.e., manipulation of computer data by hackers.  The trial court agreed with National Union, concluding that the rider’s coverage is directed at misuse or manipulation of Universal’s system rather than situations involving fraudulent submission of claims where the system is otherwise “properly utilized.”

On appeal, the Appellate Division agreed that the trial court properly interpreted the rider’s scope of coverage, reasoning that the “unambiguous plain meaning” of the rider is to “apply to wrongful acts in the manipulation of the computer system, i.e., by hackers,” and that coverage was not intended to apply to claims by “bona fide doctors and other health care providers,” who were authorized users of Universal’s billing system.  Thus, regardless of the fact that these providers were submitting fraudulent bills, the fact that they were authorized to use the system in the first instance precluded coverage under the National Union bond.