(Article from Insurance Law Alert, January 2019)
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The Vermont Supreme Court ruled that a False Pretense Exclusion was ambiguous and would not be enforced to bar coverage for losses arising from a wire transfer initiated by a fraudulent email. Rainforest Chocolate, LLC v. Sentinel Ins. Co., Ltd., 2018 WL 6817065 (Vt. Dec. 28, 2018).
A Rainforest employee received an email purportedly from his manager. The email directed him to wire approximately $20,000 to a specific bank account. After transferring the funds, the employee discovered that the email was fraudulent. Rainforest sought coverage for its loss under a business-owner policy. The insurer denied coverage, primarily relying on a False Pretense Exclusion that applied to the “voluntary parting” with property if induced to do so by fraud or false pretense. A Vermont trial court agreed with this interpretation and granted the insurer’s summary judgment motion. The Vermont Supreme Court reversed, deeming the exclusion ambiguous.
The False Pretense Exclusion was preceded by introductory language stating that the insurer “will not pay for physical loss or physical damage caused by or resulting from: False Pretense.” The Vermont Supreme Court held that this language was ambiguous as to whether or not transferred funds were “physical.” The court noted that the “policy uses the two distinct phrases—‘physical loss and physical damage’ and ‘loss and damage’—within different sections throughout the policy, sometimes switching between the two sentence to sentence,” without defining or explaining the difference between the terms. The Vermont Supreme Court interpreted the exclusion in Rainforest’s favor, holding that the loss of transferred funds was not physical in nature and thus that the False Pretense Exclusion did not apply.
The Court remanded the matter for a determination of whether the loss was otherwise covered by “Forgery” or “Money or Securities Theft” provisions. The court noted that there could be no coverage under the “Computer Fraud” provision, which applied only to “physical loss of or physical damage to money . . . resulting from computer fraud,” based on the court’s conclusion that the loss was not physical.