In American Tooling Center, Inc. v. Travelers Casualty and Surety Company of America, No. 17-2014, — F.3d —- (July 13, 2018), the U.S. Court of Appeals for the Sixth Circuit reversed a district court decision that a Michigan manufacturer’s $834,000 loss was not covered under the “Computer Fraud” coverage of its Travelers commercial crime policy.  The insured manufacturer, American Tooling Center, Inc., had authorized payment to a foreign bank account in response to fraudulent emails appearing to have been sent from one of its Chinese vendors.  Because that vendor had, in fact, previously issued valid invoices based on the achievement of certain production milestones, the email scam was successful.  After Travelers denied coverage on the ground that the manufacturer’s $800,000 payment was not a covered loss under the policy, the manufacturer sued for breach of contract.  The U.S. District Court for the Eastern District of Michigan granted summary judgment in favor of Travelers.  The manufacturer appealed and, in a published decision dated July 13, 2018, the Sixth Circuit reversed.

Travelers’ computer crime coverage provided it would “pay the Insured for the Insured’s direct loss of, or direct loss from damage to, Money, Securities and Other Property directly caused by Computer Fraud.”  The term “Computer Fraud,” in turn, was defined as “[t]he use of any computer to fraudulently cause a transfer of Money, Securities or Other Property . . . .”  Because of certain events that occurred between the manufacturer’s receipt of the fraudulent emails and its transfer of funds to the impersonator – including verification of the Chinese vendor’s achievement of production milestones and the entry of new wiring instruction account numbers received from the impersonator – Travelers argued that the manufacturer’s loss had not been “directly caused” by the fraudulent emails.

While the District Court Judge agreed with Travelers and found that various “intervening events” had occurred between receipt of the fraudulent emails and the transfer of funds, the Sixth Circuit held that the manufacturer’s loss was, in fact, “directly caused” by the fraudulent emails and, therefore, covered as “Computer Fraud” under the manufacturer’s policy.  As the Court explained, “ATC immediately lost its money when it transferred the approximately $834,000 to the impersonator; there was no intervening event.”

Due to the availability of newer policies offering specific coverage for social engineering theft and the existence of conflicting court decisions interpreting computer crime coverage under similar circumstances, the long-term impact of the Sixth Circuit’s decision in American Tooling Center is unclear.  However, in light of the increasing frequency of socially engineered email schemes, and the aggressive manner in which insurers have contested this type of coverage, policyholders should closely scrutinize their existing cyber and commercial crime policies to ensure they have clear and adequate coverage for loss caused by email scams.    

Travelers filed a petition for rehearing with the Sixth Circuit on July 27, 2018.