The Limits of Crime Coverage Insurance Policies

We have all heard the news stories and warnings involving fraudsters posing as legitimate businesses in order to obtain banking information from unsuspecting individuals to defraud them out of large sums of money. Large corporations are not immune from these types of fraudulent activities and will often purchase insurance to cover their losses. But are there limits to the kind of fraud loss covered by a crime coverage policy?

This question was recently addressed by the Alberta Court of Queen’s Bench in The Brick Warehouse LP v. Chubb Insurance Company of Canada, 2017 ABQB 413. In that case, an individual posing as a representative of Toshiba called the Brick’s accounts payable department on several occasions and persuaded the department’s employees to change the account information for Toshiba so that the Brick’s payments to Toshiba were directed to a new bank account. The Brick made the change without taking independent steps to verify that the caller was from Toshiba. The Brick made 10 payments totalling over $300,000 to the fraudulent account.

The fraud was discovered when an actual representative of Toshiba called the Brick to inquire about unpaid invoices. A police investigation was launched and it was discovered that a man purporting to be from Dubai had received the funds. Some of the fraudulently transferred funds were recovered by police. However, the Brick made a claim to its insurer, Chubb Insurance, for the unrecoverable balance of approximately $225,000. Chubb Insurance denied the Brick’s claim on the basis that the “funds transfer fraud” definition in the policy did not cover the type of loss suffered by the Brick:

Funds transfer fraud means the fraudulent written, electronic, telegraphic, cable, teletype or telephone instructions issued to a financial institution directing such institution to transfer, pay or deliver money or securities from any account maintained by an insured at such institution without an insured’s knowledge or consent.

The Alberta Court of Queen’s Bench held that, although the Brick intended to insure itself against loss resulting from criminal action, the wording of the policy did not cover a fund transfer done by Brick employees and with the Brick’s “knowledge or consent”. In this case, the fraud was in persuading Brick employees to change the payment account. The Brick’s employees directed its bank to transfer funds from the Brick’s account into the fraudulent account; the transfers were done with the Brick’s knowledge and consent. Accordingly, the Brick’s case was dismissed.

This decision demonstrates, once again, the importance of reading a policy’s wording carefully to ensure it provides the intended coverage. It also serves as a cautionary tale to businesses, reminding them to take proactive steps to limit their exposure to fraud.