The policy's false pretense exclusion relied upon the insurer to deny coverage for an act of cyber fraud was found ambiguous. Rainforest Chocolate v. Sentinel Ins. Co., 2018 VT LEXIS 140 (Vt. Dec. 28, 2018).
Rainforest Chocolate, LLC was insured under a business-owner policy issued by Sentinel. In May 2016, a Rainforest employee received an email purportedly from his manager, directing the employee to transfer $19,875 to an outside bank account through an electronic-funds transfer. After the transfer was made, the employee discovered a fraudster had taken control of the manager's email account and had directed the transfer. Rainforest contacted the bank, which froze it account and limited the loss to $10,261.36.
Rainforest reported the loss to Sentinel. Sentinel denied coverage, primarily relying on an exclusion for physical loss or physical damage caused by False Pretense that concerned "voluntary parting" of the property.
Rainforest sued Sentinel. The parties filed cross-motions for summary judgment. The trial court granted Sentinel's motion and entered judgment. Rainforest appealed.
Rainforest argued that the False Pretense Exclusion did not apply because it only excluded "physical loss or physical damages" and the loss here was not a physical loss. The Vermont Supreme Court found the reasoning of the Montana Supreme Court, construing the same provision, to be reasonable. Ad Advert Design, Inc. v. Sentinel Ins.,, 2018 U.S. Dist. LEXIS 165467 (D. Mont. Sept. 26, 2018).
The False Pretense Exclusion was ambiguous. Just because funds, whether or not in current use, fell under the policy's definition of "money" did not mean that "money" could only be subject to physical loss. The Forgery provision of the policy stated that Sentinel "will pay for loss resulting directly from forgery . . . in 'money.'" The Money and Securities provision stated that Sentinel "will pay for loss of money,'" while the Computer Fraud provision said that Sentinel will pay "for physical loss or physical damage to 'money.'" This differing use of "physical loss" and "loss" meant it could not be said that all "money" was subject solely to physical loss simply because funds, whether or not in current use, qualified as "money" under the policy.
The policy used the two distinct phases - "physical loss and physical damage" and "loss and damage" - within different sections throughout the policy, sometimes switching between the two sentence to sentence, which would lead the average reader to assume there was some difference between them. But the policy itself did not define or explain the difference between the two phrases. Construing the phrase in Rainforest's favor, the loss was not physical and thus coverage was not barred by the False Pretense Exclusion.
Still at issue, however, was whether the loss was covered by any of the policy's provisions, including Forgery and Money and Securities. The case was remanded for the trial court to determine whether the remaining provisions provided coverage for Rainforest's loss.
