The United States District Court for the District of New Jersey, applying New Jersey law, has held that an insurer does not need to cover more than $480,000 that an insured transferred pursuant to fraudulent instructions. The court determined that the circumstances implicated an exclusion that precluded coverage for loss that arose out of the theft or misappropriation of funds. Authentic Title Servs., Inc v. Greenwich Ins. Co., 2020 WL 6739880 (D.N.J. Nov. 17, 2020).

The insured, a title insurance agent, acted as the title and settlement agent for a real estate transaction in New Jersey. After the closing was postponed, the agent tried to return the loan proceeds to the mortgage lender. As part of that process, the agent received emails from individuals purporting to be representatives of the lender concerning the wire details for the return of the funds. Relying on the instructions provided, the agent transferred the loan proceeds of $480,750.96, only later to find out that he had been communicating with fraudsters and had transferred the funds to a fraudulent bank account.

The title insurer for the agent filed a claim against the agent and requested immediate payment. The agent then sought coverage for the loss under its errors and omissions policy. The insurer denied coverage on several grounds, including an exclusion providing that the policy did not apply to any claim arising out of “the commingling, improper use, theft, stealing, conversion, embezzlement or misappropriation of funds or accounts.”

In the ensuing coverage action, the agent argued that the exclusion must be interpreted to reach only conduct by the insured, and that because the terms “theft,” “stealing,” “misappropriation,” and “conversion” could be interpreted to include conduct by both the insured and third parties, the exclusion was ambiguous and rendered coverage illusory.

The court disagreed and determined that the exclusion broadly encompassed conduct by the insured or a third party. The court pointed to other cases that construed similar policy language, and noted that those courts found that the exclusion “unambiguously precluded coverage for a third party’s misappropriation or theft of funds,” and that the wording says nothing about who must engage in the theft or misappropriation of funds. Accordingly, the court granted the insurer’s motion for summary judgment.