(Article from Insurance Law Alert, March 2023)
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Holding
A New Jersey district court denied an insurer’s motion to dismiss, ruling that a policyholder sufficiently alleged “ownership” of funds it never held for purposes of seeking coverage for wire transfer losses incurred as a result of an email hacking scheme. Montachem International Inc. v. Federal Ins. Co., 2023 U.S. Dist. LEXIS 38640 (D.N.J. Mar. 8, 2023).
Background
A hacker gained access to the email account of a Montachem sales representative and thereafter sent emails providing new payment and banking information for customers. As a result of the fraudulent emails, a customer sent payment to the hacker’s account. When Montachem discovered the fraud, it sought coverage from Federal under computer fraud and forgery provisions. Federal denied coverage, arguing that Montachem never owned the funds that were transferred, a prerequisite to coverage under the policy. In ensuing litigation, Federal moved to dismiss the coverage suit.
Decision
The court denied Federal’s motion, ruling that Montachem adequately alleged ownership of the lost funds. The “Ownership” clause in Federal’s policy provided that computer fraud and forgery coverage apply only to money “owned by” Montachem, “held by” Montachem “in any capacity,” or for which Montachem is “legally liable.” Federal argued that the complaint failed to allege any of these requirements because Montachem alleged that its customer transferred funds from the customer’s own bank account to the hacker. As such, Federal asserted that Montachem never owned or “held” the lost funds. Rejecting this contention, the court reasoned that Montachem alleged, indirectly, that it “held” the funds in its capacity as a holder of an account receivable. The court explained that this allegation satisfied the requirement of “held . . . in any capacity” for purpose of denying Federal’s motion to dismiss.
Comments
In a case involving a nearly identical factual scenario, a different New Jersey district court granted the insurer’s motion to dismiss based on the absence of allegations of “ownership.” See Posco Daewoo Am. Corp. v. Allnex USA, Inc., 2017 U.S. Dist. LEXIS 180069 (D.N.J. Oct. 31, 2017) (discussed in our November 2017 Alert). The Montachem court distinguished Posco, noting that the ownership provision in Posco covered property that the insured “owns or leases,” “holds for others,” or for which the insured is “legally liable,” but did not include the more expansive phrase “in any capacity.” This decision highlights the importance of policy language in this context, particularly the arguably expansive phrase “in any capacity.”