Two endorsements precluded coverage for cyber theft experienced by the insured. Midlothian Enterprises, Inc. v. Owners Insurance Company, 2020 U.S. Dist. LEXIS 30237 (E.D. Va. Feb. 20, 2020).
JoAnne Davis received an email from the Midlothian president and shareholder, E. Bryce Powell, asking her to wire money to a specified bank account. As part of her job, Davis would wire money from Midlothian's bank account to other bank accounts when asked to do so by Powell. Little did she know that hackers sent the email from Powell's email account. She complied with the emailed instructions and wired $42,302.46 to a bank account in Alabama.
Once the theft was discovered, it was reported to Midlothian's insurer, Owners Insurance Company. Owners denied coverage based on a voluntary parting exclusion of the money and securities endorsement and a forgery or alternation endorsement. Midlothian sued and both parties moved for summary judgment.
Under the voluntary parting exclusion, Owners did not cover a "[l]oss resulting from [Midlothian's] being induced by any dishonest act to voluntarily part with title to or possession of any property." The court found that the plain language of this exclusion unambiguously included Madlothian's loss. Davis, acting on behalf of Powell, wired money from Midlothian's bank account to the hackers' bank account. Although Powell did not make the request, this did not change the voluntariness of the transfer itself. Further, the exclusion applied to any voluntary parting "induced by any dishonest act," a broad category that included fraud.
The forgery or alternation endorsement provided coverage for loss due to forgery or alteration of "any Covered Instrument." "Covered Instruments" were defined as "[c]hecks, drafts, promissory notes, or similar written promises, orders, or directions to pay a sum certain in money." Midlothian contended that the fraudulent email constituted an order or direction to pay money. Owners argued that the "orders or directions to pay" had to be similar to a check, draft or promissory note for the endorsement to apply, and the fraudulent email was not similar to those types of items.
The court agreed with Owners. An email from a business owner telling an employee to wire money to a bank account did not have the same form or legal effect as a check, draft, or promissory note. Thus, the email was not a "covered instrument" under the terms of the endorsement.
Consequently, the court granted Owners' motion for summary judgment and denied Midlothian's motion.
