Fraudster Collects Over $250,000

Crime Protection Policy Protects Insured Against Fraud
Valero Followed Instructions from Fraudster

In Valero Title Incorporated, doing business as Valero Title Company v. RLI Insurance Company, No. 22-20155, United States Court of Appeals, Fifth Circuit (February 1, 2023) Valero sued its insurer RLI Insurance Company that denied Valero's proof of loss claim, which RLI determined was not covered by the funds transfer fraud endorsement in Valero's crime protection insurance policy. The district court disagreed and granted partial summary judgment to Valero. RLI appealed.

FACTS

Valero purchased a crime-protection policy from RLI that included a funds transfer fraud endorsement providing that "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. The relevant definition for "fraudulent instruction" is "[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 by you, but was in fact fraudulently issued without your knowledge or consent."

A Valero employee was discussing a loan payoff transaction over 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. Because the Valero employee did not recognize that these instructions were fraudulent, she instructed Valero's 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 determined that the loss was not covered by the funds transfer fraud endorsement.

The parties filed cross motions for summary judgment. The only issue before the district court was the interpretation of the insurance policy. The parties stipulated to the amount of attorney's fees and agreed to the dismissal of Valero's remaining extracontractual claims, which the court accepted to make the judgment final and appealable. RLI timely appealed.

ANALYSIS

A genuine issue of material fact exists when the evidence is such that a reasonable jury could return a verdict for the non-moving party. Under Texas law, the interpretation of an insurance policy is a question of law for the court to determine.

RLI appealed the district court's interpretation of Valero's insurance policy funds transfer fraud endorsement.

The relevant provision of the policy at issue here, the funds transfer fraud endorsement, provides for reimbursements of funds lost to certain forms of fraud:

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.

The endorsement contains the following relevant definition:

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 by you, but was in fact fraudulently issued without your knowledge or consent.

RLI argued that because the instruction here was issued as it was authorized and approved by Valero, it cannot be "a written instruction . . . issued by you, which was forged or altered by someone other than you without your knowledge or consent." The district court held that the only interpretation of Clause A that does not render Clause B meaningless is one in which a written instruction is forged or altered by someone other than the insured without the insured's knowledge or consent prior to being issued by the insured.

RLI argued that the district court ignored plausible scenarios under which Clause A could apply without making Clause B redundant. RLI proposes that if Valero had forwarded the exact e-mail forged by the fraudster (posing as the lender) to Valero's bank, instead of issuing its own wiring instructions, Clause A would apply.

The instruction Valero issued to its bank included the name of the recipient institution, the routing number, the recipient account numbers, the account name, the payment date, and the total amount of payment. It was the same instruction Valero received from the fraudster posing as the lender. Unknown to Valero, the instruction was not the same as the instruction provided by the lender; it was altered to include different recipient account information. Thus, 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."

As the district court held, the only interpretation of Clause A that does not render Clause B meaningless is one in which a written instruction is forged or altered by someone other than the insured without the insured's knowledge or consent prior to being issued by the insured.

The district court correctly applied this interpretation and found that coverage was trigged under the funds transfer fraud endorsement for Valero's claimed loss.

ZALMA OPINION

Insurance contracts are interpreted as written. The insuring agreement provided coverage for frauds perpetrated against an insured causing the insured to send money to a fraud perpetrator rather than to the lender it had agreed to pay off. Since the language of the policy was clear and unambiguous, it covered the error of the Valero employee who accepted an e-mail instruction to send the money it owed to a fraud perpetrator's account rather than to the account of the lender to whom the money was owed.

(c) 2023 Barry Zalma & ClaimSchool, Inc.

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Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com

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