A New Jersey federal district court has held that a declaratory judgment and breach of contract action against a professional liability insurer was not subject to dismissal for failure to state a claim based on the policy’s conversion of funds exclusion as a matter of law because the court could not conclude whether conversion occurred, or whether the claim arose out of conversion, at such an early stage in the proceeding. ABL Title Ins. Agency, LLC v. Maxum Indem. Co., 2016 WL 3610163 (D.N.J. June 30, 2016).

In connection with a real estate sale for which the insured title agency served as the closing agent, and after the insured had issued a check to the seller, the insured was forwarded fraudulent wiring instructions sent by a hacker using an email address resembling that of the seller’s attorney. An employee of the insured, apparently failing to follow standard and prudent wire transfer procedures, initiated a wire transfer of $579,360.48 the following business day. After the transfer resulted in a shortfall in the insured’s accounts, several other parties made demands on the insured for dishonored checks or escrowed items that the insured could not cover. The insured tendered the claim to its professional liability insurer, and, after the insurer did not confirm or deny coverage for a period of time, the insured filed an action for a declaratory judgment as to coverage and breach of contract.

The insurer sought dismissal of the complaint for failure to state a claim upon which relief could be granted based on a policy exclusion stating that the insurer had no duty to defend or indemnify any claim or suit “arising out of or resulting from . . . [a]ny damages arising out of the commingling, conversion, misappropriation or defalcation of funds or other property.” The insurer asserted in its moving papers that the insured’s employee committed conversion, and in its reply papers that the hacker committed conversion, and that, in either case, the exclusion applied. The insured argued that its claim arose not out of conversion, but instead out of its employee’s negligence in initiating a wire transfer without following proper procedures. The insured further contended that its employee could not have converted the property because it was authorized to issue money to sellers at the direction of the buyer’s attorneys, and that the hacker could not have converted the property because it was unclear who had the right to immediate possession of the property with which the hacker interfered.

The court held that dismissal would require the court to summarily determine that the claim for coverage arose out of a conversion, and that it was not in a position to do so at such an early stage of the proceedings. The court concluded that the applicability of the policy exclusion was a question of law dependent on underlying questions of fact (whether the tort of conversion occurred) and that it therefore could not determine from the factual allegations that the conversion exclusion barred coverage. Accordingly, it denied the carrier’s motion to dismiss.