A recent groundbreaking case decided February 1, 2023, from the United States Court of Appeals for the Fifth Circuit highlights the importance of broad insurance coverage for title agents and other businesses vulnerable to financial fraud and has positive coverage implications for Virginia lawyers, lay settlement agents, and title insurers.
In Valero Title Inc. v. RLI Ins. Co., a Texas escrow agent (Valero) purchased a crime-protection policy from RLI Insurance Company that included a funds transfer fraud endorsement. Below is a link to the opinion.
(22-20155.0.pdf (uscourts.gov)),
The policy endorsement provided that the insurance company “will pay for loss of funds resulting directly from a fraudulent instruction directing [sic] financial institution to transfer, pay or deliver funds from your transfer account.” A “fraudulent instruction” was defined as “[a] written instruction . . . issued by you, which was forged or altered by someone other than you without your knowledge or consent, or which purports to have been issued by you, but was, in fact, fraudulently issued without your knowledge or consent.”
Simple enough, right?
Well, a Valero employee was discussing via e-mail a loan payoff transaction with a lender’s employee. Via email, a fraudster posed as the lender’s employee and sent the Valero employee fraudulent wiring instructions with a fraudulent routing number.
Because the Valero employee did not realize that these instructions were fraudulent, she unknowingly instructed Valero’s bank to wire $250,945.31 to the fraudster’s account.
When Valero learned of the loss, it submitted a claim to the insurance company, but the insurance company denied coverage.
The insurance company argued that because the transfer instruction was issued by Valero after its review and approval, it was not “a written instruction . . . issued by you, which was forged or altered by someone other than you without your knowledge or consent.” That is, the insurance company effectively argued that the forgery or alteration had to occur after the issuance of the instruction.
On cross-motions for summary judgment, the trial court held in favor of the insured, and the Fifth Circuit affirmed on appeal.
The court employed ordinary contract interpretation principles to analyze the policy language in a way that harmonizes each provision, leaving no provision superfluous or redundant.
The court held that, in order to avoid redundant effects, the policy provided coverage for situations in “which a written instruction is forged or altered by someone other than the insured without the insured’s knowledge or consent prior to being issued by the insured.” Slip Op. at 4-5 (emphasis added).
Valero received an instruction from the fraudster posing as the lender. “Unknown to Valero, the instruction was not the same as the instruction provided by the lender; it was altered to include different recipient account information. Thus, when Valero issued the instruction to its bank, it was a fraudulent instruction that was ‘forged or altered by someone other than [Valero] without [Valero’s] knowledge or consent.’” Slip Op. at 5. As a result, the policy endorsement covered the loss.
Each insurance policy is different. Each insurance policy is filled with detailed language to be parsed. This recent significant ruling highlights the importance of having insurance coverage in place for title companies, agents, lawyers and others involved in the transfer of large sums of money. In Valero, even where an escrow agent purchased a policy and endorsement over and above a regular errors and omission policy, there was a dispute of coverage for a classic scam. Fraudsters, hackers, and scammers frequently pray upon loan closers, and once these funds are gone, absent swift, targeted actions, the funds are typically gone for good.
