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Home / Insurance / Technical coverage for social media systems in light of New Jersey Federal Court's opinion finding no errors and omissions coverage for email fraud

Technical coverage for social media systems in light of New Jersey Federal Court's opinion finding no errors and omissions coverage for email fraud



It's a warning story about cyber fraud. A title agent in a real estate transaction receives an email from the mortgage lender that provides instructions for transferring the loan to a settlement account. After transferring the money ($ 520,000), it becomes apparent that the transfer instructions came from an email address that was a letter from from the mortgage lender's actual email address – it was a scam. But it is too late, the fraudster has already withdrawn the funds from the settlement account and can not be traced.

These were the circumstances underlying the decision of a federal court in New Jersey on November 17, 2020, in Authentic Title Services, Inc. v. Greenwich Insurance Co., et al. Civil No. 1

8-3121 (KSH) (CLW) (DNJ 17 November 2020). The court refused to find coverage for the fraud and the resulting claim for payment from the lender under Authentic's Error and Failure (E&O) insurance. In the E&O policy, the insurer agreed to pay “damages and defense costs that arose due to a claim. . . due to an actual or alleged negligent act or omission or personal injury in the performance of professional services. . . . The E&O insurer denied coverage for the claim based on an exclusion for all claims based on or arising from "mixing, misuse, theft, theft, conversion, embezzlement or misuse of funds or accounts" ("Theft Exemption"). Following the denial of coverage, the title agent brought an action against the E&O insurer who sought coverage for the claim.

In deciding the cross-proposal for a summary judgment, the New Jersey Federal Court examined whether the claim falls within the E&O policy theft exemption based on "theft", "theft", "conversion" or "abuse" of the settlement funds. By providing dictionary definitions for the terms, which were not defined in the policy, the court ruled that the exclusion of theft unequivocally precludes coverage of the claim. Id . More specifically, the court ruled that the settlement funds had been "embezzled", so that it was about "using other people's property or money dishonestly for their own use." The court also concluded that there was no language in the theft exemption that would limit its application to the conduct of non-insured persons. Therefore, the court granted the insurer's proposal for a summary judgment and denied the title agent's cross proposal for a summary judgment.

The decision Authentic illustrates the importance of policyholders carefully examining all their insurances for any gaps. in coverage of common cybercrimes, such as email scams and social technology programs like these. Had the title agent in Authentic reviewed his E&O policy prior to the email fraud discussed above, he could have paid an extra premium to remove the policy's theft exemption, and / or he may have purchased additional coverage for these circumstances. In fact, such risks are typically, and may be more appropriate, covered by a commercial criminal insurance and / or trust insurance with fraudulent transfer and / or social technology. Although criminal insurance can limit social technology and / or fraudulent transfer coverage to amounts between $ 100,000 and $ 500,000, policyholders can often seek "drop-down" surpluses that will apply the sublimity surplus in their primary criminal insurance to create total limits (in the surplus program) which exceeds those which they may be able to buy on the primary form of crime alone. In addition, some cyber insurance companies will offer excessive social security coverage for an extra premium. Authentic serves as a warning report for policyholders to work with the competent policyholder's advice to ensure they have adequate insurance coverage in place for renewal or procurement of insurance policies. These standard insurance gaps can and should be filled before your next renewal.


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