The court determined that the insured's policy did not cover the theft of funds orchestrated by instructions from fraudsters. Star Title Partners of Palm Harbor, LLC v. Illinois Union Ins. Co., 2021 U.S. Dist. LEXIS 193001 (M.D. Fla. Sept. 1, 2021).
Star Title was a title company retained by Neil Woods to act as the settlement agent for the sale of his home. Star Title's duties included receipt and distribution of the sale proceeds. Star Title used a processor and a closer for each closing. The processor cleared title for the property, while the closer distributed funds at the time of closing. The practice of segregating the closing process did not include nay steps designed to verify the authenticity of the wire transfer instructions.
The processor contacted Woods' lender, CMS, for payoff information and was told to submit her requests by email. An email was sent requesting a "Mortgage Loan Payoff Letter" in anticipation of a closing scheduled for August 9, 2019. The processor provided the name of the sellers/mortgagors, the address of the property, the loan number, and the closing date.
In response, the processor received an email purportedly from a CMS Payoff Representative with instructions for the transfer of payoff funds. That same day, Star Title received a second copy of the Payoff Statement sent via facsimile purportedly from "Capital Mortgage of Texas." The processor determined that the Payoff Statement was authentic and that no additional steps were required to verify the authenticity of the Payoff Statement.
The day of the closing, the processor initialed the transfer of payoff funds from Star Title's escrow account pursuant to the instructions on the Payoff Statement. The closer then approved the wire transfer in accordance with Star Title's two-person authentication protocol, which required the closer to review the wire information to confirm that it matched the information in the paper file. The closer approved the wire transfer in the amount of $180,902 to the referenced account.
After investigation, Star Title determined that the wire instructions were fraudulent. Star Title tendered its claim to Illinois Union pursuant to its Cyber Protection Package Policy. The policy included an endorsement for cybercrime which provided coverage for Deceptive Transfer Fraud. Illinois Union denied coverage. Star Title sued and Illinois Union moved for summary judgment.
The policy required Star Title to prove that (1) the perpetrator purported to be an employee, customer, client or vender; and (2) the authenticity of such transfer request was verified in accordance with Star Title's internal procedures. The undisputed facts demonstrated that Star Title could not establish either of these requirements because CMS was not Star Title's employee, customer, client, or vendor and Star Title made no attempt to verify the authenticity of the transfer request.
Summary judgment was awarded to Illinois Union.
