Third-Party Wire Fraud Triggers Conversion Exclusion Under Professional Liability Policy, Despite Insured’s No Direct Involvement in Theft of Funds – Laws and Insurance Products

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Under New Jersey law, the United States District Court for the District of New Jersey has ruled that a conversion exclusion prohibits coverage under a professional liability policy for multiple claims against a corporation of title insured as a result of a third-party wire fraud that left the title company with insufficient funds to make necessary customer payments in connection with the real estate closings. Title ABL Ins. Agency c. Maximum Indem. Co.2022 WL 986271 (DNJ 31 Mar 2022).

The insured, a title agency, maintained an escrow account containing client funds for use in real estate transactions. The insured acted as the closing agent of a real estate transaction. At closing, the insurer issued a check to the seller of the insured’s escrow account in the amount of $579,360.48. Later that day, a third-party fraudster, posing as the seller’s attorney, emailed the buyer’s attorney requesting electronic payment instead of the check. The buyer’s lawyer received telegraphic instructions from the fraudster, which he then transmitted to the insured. According to the new instructions, the insured transferred $579,360.48 from the insured’s escrow account to the fraudster, who misappropriated the funds. Due to the fraud, the insured paid the amount of the sale twice, leaving his escrow account with a deficit of $579,360.48. Subsequently, several escrow account checks were returned due to insufficient funds, leading aggrieved customers to file lawsuits against the insured.

The insured requested coverage under a professional indemnity policy. In subsequent coverage litigation, the insurer sought summary judgment, arguing that the policy did not cover insufficient funds claims because the claims arose from wire fraud and, therefore, were excluded under the policy exclusion for “[a]any damages arising from the mixing, conversion, diversion or embezzlement of funds or other property. The insured argued that the exclusion only applied if an insured was directly involved in the conversion or that, at best, the exclusion was ambiguous and should be construed in favor of coverage.

The court disagreed with the insured and entered summary judgment in favor of the insurer. In making this decision, the court concluded that the exclusion was unambiguous and applied to any claim arising from a conversion, whether or not the conversion was carried out by the insured. The court distinguished the conversion exclusion from other exclusions in the policy which specifically exclude coverage of specified acts “by any ‘insured'”. Further, the court recognized the expansive interpretation of “arising from” in the exclusion’s introductory language, upheld that wire fraud constitutes a “conversion” under New Jersey law, and determined that the insufficient funds claims all arose out of, arose out of and had a substantial connection with the fraudster’s conversion.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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