In Helms v. Hanover Insurance Group Inc., the U.S. District Court for the District of Arizona weighed in on the issue whether a professional liability policy provided insurance for a fraudulent wire transfer. This decision is not the first to tackle this issue, and like the other opinions issued across the country, Helms demonstrates that the answer to this somewhat thorny question depends heavily on the specific policy wording at issue.
The insured plaintiffs, a realtor and real estate agency, represented Joseph and Carla Thuney to assist the Thuneys in finding a home. After exchanging unencrypted emails, the Thuneys received an email from someone purporting to be an agent of the title company with wire instructions for the Thuneys’ $120,000 down payment. The Thuneys wired the payment, only to discover that the title agent was a fraudster. Despite their efforts to stop the wire transfer, the payment was wired to the fraudster.
Thereafter, the Thuneys filed suit against the insureds claiming that they breached fiduciary duties and acted negligently in the course of the real estate transaction, thereby causing the fraudulent transfer. More specifically, the Thuneys contended that the insureds used unencrypted emails to send important documents, including the executed sales contract, earnest deposit receipt, a seller disclosure statement, and home inspection instructions. The Thuneys contended that the insureds used unencrypted emails despite their knowledge of the risks associated with those emails and failed to take reasonable steps to prevent the misappropriation of the Thuneys’ confidential information.
At the time of the real estate transaction, the insureds were independent contractors of RE/MAX, the named insured on a professional liability insurance policy issued by Hanover. Pursuant to the policy’s terms and conditions, the policy provided insurance for “damages and claim expenses because of a claim against you arising from a wrongful act in the rendering or failure to render professional services,” which the policy defined as “real estate agent/broker, business broker and/or property management.”
RE/MAX tendered the suit to Hanover under the policy. Hanover denied coverage under the terms of the policy for several reasons, including a “false pretenses exclusion” in the policy that operated to bar coverage for claims “based upon, arising out of or in any way related to any transfer, payment or delivery of funds, money or property, by anyone, which was caused or induced by trick, artifice, or the fraudulent misrepresentation of a material fact including, but not limited to, social engineering, pretexting, phishing, spear phishing, or any other confidence trick.”
Thereafter, the insureds filed suit against Hanover for breach of contract and bad faith. The insureds made two arguments against the operation of the false pretenses exclusion to bar coverage. First, the insureds argued that “the based upon, arising out of or in any way related to any transfer” language in the exclusion was broad and ambiguous. The court, however, found that the phrase was not ambiguous and, interpreted correctly, was not limited to claims arising out of the insured’s own tricks, artifices, and fraud. By its explicit terms, the exclusion applied to “payment … of funds … by anyone.” In addition to the terms of the exclusion itself, the court supported its conclusion by reasoning that if the false pretenses exclusion were interpreted as limited to the insured’s fraud, it would be rendered superfluous because the policy contained another exclusion for claims arising out of the insured’s fraudulent acts or omissions. Because there was no limitation on the face of the exclusion to the insured’s conduct, the court held that the insured’s interpretation of the exclusion was untenable.
Second, and in the alternative, the insureds argued that the false pretenses exclusion did not apply because the Thuneys’ claims were based on the insureds’ improper handling of the Thuneys’ confidential information, as opposed to a claim for misappropriating funds or committing fraud, as well as other vague non-specific allegations of wrongdoing. The court rejected this argument, reasoning that the Thuneys’ claims at the very least “relate[d] to” the transfer of funds that was induced by trick or artifice. As such, the court found the false pretenses exclusion applied to bar coverage.