Fifth Circuit Affirms Coverage for Fraudulent Transfer of Funds

    The Fifth Circuit affirmed the district court’s determination of coverage in a case involving cyber fraud. Valero Title Inc. v. RLI Ins. Co., 2023 U.S. App. LEXIS 2571 (5th Cir. Feb. 1, 2023).

    Valero Title, Inc. purchased a crime-protection policy from RLI that included a funds transfer fraud endorsement. The endorsement provided, “we 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.” “Fraudulent instruction” was “[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 to you but was in fact fraudulently issued without your knowledge or consent.”

    A Valero employee was discussing a loan payoff transaction by email with a lender’s employee when a fraudster posed as the lender’s employee and sent the Valero employee fraudulent wiring instructions with a fraudulent routing number. The Valero employee instructed her bank to wire $250,945.31 to the fraudster. When Valero learned of the loss, it submitted a proof of loss claim to RLI. RLI denied the claim, determining that the loss was not covered by the funds transfer fraud endorsement.

    Valero filed suit. Cross motions for summary judgment were filed. The district granted Valero’s partial motion for summary judgment and denied RLI’s motion, holding that the loss was covered under the policy. RLI appealed,

    The parties disputed the meaning of the definition of “fraudulent instruction” which read “a written instruction . . . issued by you, which was forged or altered by someone other than you without your knowledge or consent.” RLI argued that because the instruction here was issued as it was authorized and approved by Valero, it could not be “a written instruction . . . issued by you, which was forged or altered by someone other than you without your knowledge or consent.” This construction, however, could not be harmonised with the rest of the policy and would make the remaining portion of the definition of “fraudulent instruction” redundant. 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.”

    Therefore, the district court properly interpreted the definition of “fraudulent instruction” and found that covered was triggered under the funds transfer fund endorsement for Valero’s loss.