The Sixth Circuit, overturning the district court's award of summary judgment to the insurer, reversed and remanded denial of the claim for computer fraud. Am. Tooling Center, Inc. v. Travelers Cas. and Sur. Co of Am., 895 F.3d 455 (6th Cir. 2018).
American Tooling Center (ATC) produced stamping dies for the automotive industry. The company outsourced some of its manufacturing orders. Shanghai YiFeng Automotive Die Manufacture Co., Ltd. (YiFeng) was one of ATC's vendors, located in China. To be paid, YiFeng emailed ATC invoices. ATC then went through a multi-step process before wiring money to YiFeng.
To initiate a wire transfer, ATC's Treasurer, Gary Gizinski, signed into a banking portal using software on his computer. He manually entered the payee's name, banking information, and the amount to be wired. ATC's Assistant Comptroller then logged into the banking portal using his computer to approve the payment.
On March 18, 2015, after following these steps, Gizinski emailed YiFeng requesting it provide ATC all outstanding invoices. The email was intercepted by an unidentified third party. This third party then began a correspondence with Gizinski about the outstanding invoices. On March 27, 2015, the impersonator emailed Gizinski and claimed that, due to an audit, ATC should wire its payments to a different account. ATC had no process for verifying the changed information. Consequently, Gizinski wired the money to the new account. Two more fraudulent transfers were made. The total amount wired to the impostor was $834,000. When the real YiFeng demanded payment, ATC realized it had wired the money to an imposter. ATC paid YiFeng 50% of the outstanding debt, and agreed that the remaining 50% would be contingent on ATC's insurance claim.
ATC sought recovery for its loss from Travelers, arguing that it fell within the "Computer Fraud" provision of its Wrap business insurance policy. Travelers denied the claim and ATC sued. The district court granted summary judgment to Travelers.
The policy promised payment as follows:
The Company will pay the Insured for direct loss of, or direct loss from damage to, Money, Securities and Other Property directly caused by Computer Fraud.
Travelers argued there was no "direct loss;" this was not a case of "Computer Fraud;" and the loss was not "directly caused by Computer Fraud."
The Sixth Circuit disagreed. Under Michigan law, a "direct" loss was one resulting from an "immediate or proximate cause, as distinct from remote or incidental causes." ATC immediately lost is money when it transferred the money to the impersonator; there was no intervening event.
"Computer Fraud" was also involved. The impersonator sent ATC fraudulent emails using a computer and the emails fraudulently caused ATC to transfer the money to the impersonator. The policy did not require, as Travelers argued, that the fraud cause any computer to do anything.
Finally, ATC met its burden in showing that its direct loss was directly caused by the computer fraud. ATC suffered its loss immediately after the transfer, which marked the end of the "Computer Fraud" as defined in the policy.
The exclusions advanced by Travelers did not apply. Exclusion R provided,
This Crime Policy will not apply to loss resulting directly or indirectly from the giving or surrendering of Money, Securities or Other Property in any exchange or purchase, whether or not fraudulent, with any other party not in collusion with an Employee.
ATC correctly pointed out that it did not transfer the money to the impersonator in exchange for anything from the impersonator, and therefore the fraudulent transfer did not fall within this exclusion.
Exclusion G stated,
This Crime Policy will not apply to loss or damages resulting directly or indirectly from the input of Electronic Data by a natural person having the authority to enter the Insured's Computer System.
Here, Gizinski's manual entry of the impostor's banking details was not "Electronic Data." The fraudulent bank-routing instructions did not constitute "Electronic Data" as defined by Travelers' policy.