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Don’t scam a customer | Zalma on insurance



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IN Civitas-IT, LLC v. Auto-Owners Insurance CompanyNo. 359731, Court of Appeals of Michigan (Jan. 12, 2023) addressed a claim for loss by fraud.

BASIC FACTS

The plaintiff, an IT services company, sued the defendant for breach of contract and bad faith denial of a claim under MCL 500.2006 after the defendant denied the plaintiff’s insurance claim for computer equipment fraudulently obtained by a fraudster.

In July 2020, Plaintiff received a request from an individual claiming to be from the Macomb County Purchasing Department. The individual stated that Macomb County was interested in purchasing new computer equipment and asked the plaintiff to facilitate the transaction. Plaintiff did so only to later discover that Macomb County never ordered the equipment. The plaintiff submitted a claim for the loss to the defendant for $165,195, which the defendant disputed.

In the district court, the defendant moved for summary disposition, arguing that the policy did not cover the plaintiff’s injury because the policy expressly excluded any loss resulting from “[v]voluntary parting of any property by you to anyone else to whom you have entrusted the property if induced to do so by any fraudulent scheme, trick, device or false representation.” The plaintiff claimed that the loss was covered by the endorsement “accounts receivable”, which stated that the defendant would cover “[a]Any amounts owed to you by your customers that you cannot collect…” In response, the defendant argued that the fraudster who obtained the computer equipment was not a “customer” and therefore the endorsement did not apply.

The district court concluded that the policy did not cover the loss because the account was not an “account receivable.” Thus, the court granted the defendant’s motion for disposition. This appeal followed.

DISCUSSION

An insurance policy is read as a whole and all terms should be given meaning. Unambiguous insurance language must be enforced as written.

In the accounts receivable note, the defendant agreed to cover “[a]any amounts owed to you by your customers that you cannot collect” and “[o]the expenses you reasonably incur to restore your records resulting from direct physical loss of or damage to your accounts receivable records.” Thus, contrary to plaintiff’s argument, the term “accounts receivable” is more than just a label on the endorsement, it is a term in itself in the language of insurance. For its part, the court defined the term as involving “a bill/statement, repeated invoices followed by informal and friendly inquiries, and then stronger language and efforts.”

As worded by the trial court, the account was an account receivable because the plaintiff recorded a statement for the transaction on its accounts and made efforts to collect the funds, first with friendly solicitations and finally culminating in involving law enforcement and filing this lawsuit. Although the account itself was an account receivable, it was not an account receivable with a “customer.”

The question of whether the fraudster was a “customer” under the policy required the Court of Appeal to answer three questions.

  1. If the policy is not made ambiguous simply because the term “customer” is undefined.
  2. If the relevant question is whether the policy, when read fairly and as a whole, allows for different interpretations of whether coverage is provided.
  3. If the policy does not generally cover losses resulting from fraud.

Specifically, in the covered loss exclusions, the parties agreed that the defendant would not be liable to pay for losses resulting from “[v]voluntary parting with any property by you or anyone else to whom you have entrusted the property if induced to do so by any fraudulent scheme, trick, device or false representation.” Plaintiff claims to have negotiated this provision by incorporating accounts receivable, principally with the argument that since a customer can cause the plaintiff to suffer a loss on an account by not paying, and since a fraudster can be a customer, the fraudster, by defrauding the plaintiff, can cause the damage that must be covered by the defendant. This is not a fair reading of the entire policy as a fraudster is not a customer.

The term “customer” is defined in Black’s Law Dictionary (11th ed.) as “[a] buyer or purchaser of goods or services; especially the frequent or occasional patron of a business. The relevant terms in this definition are “purchaser” and “buyer”, both of which mean the exchange of money by the customer for goods or services from the company. In this case, not only was there an exchange of money, but it is also clear that there was never any intention on the part of the fraudster to ever pay for the computer equipment. Thus, according to the dictionary definition, the term “customer” does not include the fraudster who defrauded the plaintiff in this case.

The defendant issued the insurance to the plaintiff under which the parties agreed that the defendant would not cover losses arising from any fraudulent scheme, trick, device or false pretenses.

Insurance is a contract designed to compensate an insured against accidental losses. But even if a fraudster obtains a product by tricking the insured into thinking they were selling to a city, they were tricked and that person was not a “customer” because he or she never intended to buy the computer equipment. The “fraudulent scheme, trick, device, or false pretenses” exclusion is weepy with age and fits the facts of this claim perfectly.

(c) 2023 Barry Zalma & ClaimSchool, Inc.

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Barry Zalma, Esq., CFE, now limits his practice to serving as an insurance consultant specializing in insurance coverage, insurance claims management, insurance bad faith and insurance fraud for insurers and policyholders alike. He practiced law in California for more than 44 years as an insurance coverage and claims attorney and more than 54 years in the insurance industry. He can be reached at http://www.zalma.com and zalma@zalma.com

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