U.S. District Court for District of Mass. holds no coverage for law firm scammed by fraudulent cashier's check

In some ways, this is an eye-crossingly boring decision, even for an insurance coverage geek like myself.  It relies on definitions found in negotiable instruments law.  Need I say more?  But, coverage issues aside, the real takeaway from this post is: Lawyers, beware! These scams are growing in sophistication and constant vigilance is required.    

Law firm taken in by scam and insurer denies coverage

Law firm Brooks & DeRensis (B&D) was retained by someone calling himself Brian Rodriguez to secure money owed to him by his employer under the terms of a severance agreement.  Rodriguez emailed the employer that the payment of the amount owed to him should be sent to B&D.  B&D received a cashier's check drawn upon Wells Fargo Bank in the amount of $89,960 with a letter from the employer's chief financial officer explaining the reason for payment.  On October 28, 2021, B&D deposited the cashier's check in its IOLTA account at Cambridge Trust Bank.  On November 3, 2021, at Rodriguez's instruction, it transferred $88,385 to an account at Citbank NY, USA.  The following day, it received a letter from Wells Fargo dishonoring the cashier's check as an "altered/fictitious item."  

B&D's insurer, Twin Cities Fire Insurance Co., disclaimed coverage for the loss.  B&D filed a declaratory judgment lawsuit in federal court.  In Brooks & DeRensis P.C. v. Twin City Ins. Co., 2023 WL 6127160 (D. Mass. 2023), the United States District Court for the District of Massachusetts ruled in favor of Twin Cities.   

Forgery coverage under Amendatory Endorsement does not apply

The court first held (and B&D apparently conceded) that the policy's additional coverage for Forgery under an Amendatory Endorsement does not apply, as that coverage applies only to forgery or alteration of a check "that you or your agent has issued, or that was issued by someone who impersonates you or your agent."  That language did not come within the facts of the case.

Forgery coverage under Super Stretch Endorsement may be triggered

The policy contained a Super Stretch for Law Offices Endorsement that provided "up to $25,000 in any one occurrence as a Limit of Insurance to cover loss from forgery of covered instruments, money orders, credit cards, and counterfeit money."  The coverage "is subject to the provisions of Forgery Coverage."  

    No coverage for cashier's check as forgery or alteration

The Forgery Coverage form, in turn, provided coverage in two situations.  First, it provided coverage for "forgery or alteration" of:

a.        Checks, drafts, promissory notes, or similar written promises, orders or directions to pay a sum certain in 'money' that are:

(1)    Made or drawn upon you;

(2)    Made or drawn by one action as your agent;

or that are purported to have been so made or drawn.   

Going into negotiable instruments definitions, the court held that the cashier's check was purportedly made or drawn by or upon Wells Fargo.  B&D was the payee or the bearer, not the maker, drawer, or drawee.  Therefore, this coverage did not apply.

    Potential coverage for cashier's check as similar to a money order

The forgery coverage of the policy also provided coverage for Counterfeit Currency and Money Orders.  Covered property under that clause includes:

        a.    Money orders, including counterfeit money orders, of any United States or Canadian post office, express company, or national or state (or Canadian) chartered bank1 that are not paid upon presentation; and

        b.  Counterfeit United States or Canadian paper currency.  

The court again went into negotiable instrument definitions.  It noted that a money order has similarities to a cashier's check, and that there was therefore support for B&D's position that the policy was ambiguous as to whether "money order" included cashier's checks.  Ambiguities are resolved in favor of the insured.  The court assumed, without deciding, that the cashier's check was covered by this portion of the policy.   

Coverage excluded by False Pretenses Exclusion

The policy excluded loss or damage caused by or resulting from:

False Pretense:  Voluntary parting with any property by you or anyone else to whom you have entrusted the property if induced to do so by any fraudulent scheme, trick, devise or false pretense.  

The court held that B&D's loss came within this exclusion, because the exclusion addresses a scenario where the insured willingly transfers funds to a third-party based on a false representation or receipt of a false check.  

Massachusetts Lawyers Weekly quoted me in its article about this decision, here.  

First Circuit holds that policyholder did not breach cooperation clause when time insurer gave it to respond had not run out when insurer disclaimed coverage

 

Following an arson fire in 2021 that destroyed a building owned by BAS Holding Corporation on the Brockton Fairgrounds, Philadelphia Insurance Company undertook an investigation that focused on whether the building was vacant, which would limit coverage.  

As part of its investigation Philadelphia issued multiple document requests to BAS.  BAS cooperated fully and responded with over 700 documents.

On June 16, 2021, Philadelphia sought to take an Examination Under Oath, or EUO, of BAS.  Rather than naming a particular witness, it asked BAS to designate someone who could answer questions about eight enumerated topics.  

On August 3, 2021, BAS presented Susan Rodrigues as its designee to testify at the EUO.  She answered most questions, and if she did not know an answer to a question she agreed to research the issue and provide an answer at a later date.

During her testimony Rodrigues identified six people who might be able to provide additional information, including five maintenance workers and George Carney, the president and owner of BAS, who Rodrigues indicated might be knowledgeable about the sale of the building to BAS in 1999 and what the building had been used for other than storage since it was built in 1931.  

The day after Rodrigues testified, Philadelphia requested EUOs of the six people she had identified, and specifically noticed the EUO of Carney for August 19, 2021.  BAS replied the same day with an email stating that it would respond to Philadelphia's request in a separate correspondence. Philadelphia claims that reply was a refusal to produce Carney for an EUO.

A few days later, BAS responded more fully, asserting that the request for six additional EUOs was improper and stating that it would consider the request if Philadelphia set forth a factual basis for it.  Philadelphia asserted this communication was a second refusal to produce Carney for an EUO.  

On August 10, Philadelphia responded that it had no obligation to provide BAS with an explanation of why a further EUO was reasonably necessary.  It stated that it was permitted to take the EUO of Carney because he owns and manages BAS.  It asked that BAS confirm within the next two weeks that Carney would appear at the EUO scheduled for August 19, and to contact Philadelphia if that date would not work in order to arrange for a new date.  

Three days later, on August 13, well before the two weeks given by Philadelphia to BAS to respond,  Philadelphia denied BAS's claim for refusing its request for EUOs.  

Philadelphia then filed suit in federal court, seeking a declaration that the building was not covered under the policy, that its loss was excluded by the policy's vacancy provision, and that BAS breached the requirement that it cooperate with the EUO.

The United States District Court for the District of Massachusetts granted summary judgment to Philadelphia on the ground that BAS failed to cooperate by not providing Carney for the EUO.  BAS appealed to the United States Court of Appeals for the First Circuit.  The United States Court of Appeals for the First Circuit reversed, as the evidence "unequivocally" showed that BAS never willfully and inexcusably refused to submit to an EUO.  

The First Circuit noted that under Massachusetts law attendance at reasonably requested EUOs is a condition precedent for insurance coverage.  An insurer may disclaim coverage when faced with a "willful, unexcused refusal to submit to an examination under oath, without proof of actual prejudice."  

The court held that "there is no way" to read as a willful refusal the August 4 email in which BAS's attorney stated that he would respond at a later date to the request for the six additional EUO's. 

The court held that the next email, objecting to Philadelphia's request for the EUOs and stating that BAS would consider the request if Philadelphia would identify why they were reasonably required to do so, also could not be held as a willful and unexcused refusal.  

In the August 10 email from Philadelphia, the insurer provided additional information to BAS and asked for a response within the next two weeks.  Less than 72 hours later, Philadelphia denied the claim in part on the ground that BAS had refused to appear for the additional EUOs. 

Philadelphia also complained that Rodrigues had appeared for the first EUO.  The court held that she was a not unreasonable choice to testify on the topics listed by Philadelphia.  She handled all of the insurance for BAS, and was the operations coordinator for the Brockton Fair.  As part of that role she oversaw the use and maintenance of the fair and buildings throughout the year.  Her testimony showed that she was knowledgeable on most of the issues raised by Philadelphia.  

The court held that given the sequence and content of the email communications and Rodrigues's testimony, it is "impossible" to find that BAS willfully and without excuse refused to present Carney for an EUO.  The First Circuit distinguished those facts from cases where coverage was disclaimed after multiple failed attempts to schedule an EUO, after an EUO was missed, or weeks after an unproduction EUO was completed.  The court held that BAS's conduct bore no resemblance to the behavior of the insureds in those cases.  

Massachusetts Lawyers Weekly quoted me in an article about this case here.  

JDSupra discusses the effect on insurance claims of the tort reform measures that just became law in Florida

 

Although in this blog I generally stick to Massachusetts topics, this article from JDSupra on the new Florida tort reform measures should be of interest to anyone who practices in the insurance bad faith field.  

Here's one of my posts from a few years ago that touches on insurance litigation in Florida.  

What ChatGPT says about exclusions in insurance policies, and why I'm not worried the app will put me out of a job any time soon

 

So many people are talking about ChatGPT -- the artificial intelligence content creator -- that awareness of it has trickled down even to us attorneys, well-known to be late adopters of all technology.  I thought I'd give it a try.  I signed up for ChatGPT (which took several attempts, none of which were my fault, and included one message that I would have to wait because traffic was heavy -- not a great sign for the cuttingest-edge tech), and I input this question:

In Massachusetts what should you do if your insurance carrier says that an exclusion applies to a claim against you?

ChatGPT generated this response:

If your insurance carrier says that an exclusion applies to a claim against you in Massachusetts, you have several options:

1.     Review the policy: Make sure you understand the specific exclusion and its terms. You may want to review the policy documents and any relevant laws or regulations.

2.     Negotiate with the other party: If you believe that the exclusion should not apply, you may try to negotiate with the other party to reach a settlement.

3.     Hire an attorney: If you are unable to resolve the issue with the other party, you may want to consider hiring an attorney who specializes in insurance law. An attorney can help you understand your rights and options and represent you in negotiations or in court.

4.     File a complaint with the Massachusetts Division of Insurance: If you are dissatisfied with the insurance company's decision, you may file a complaint with the Massachusetts Division of Insurance. This agency can investigate the matter and take appropriate action, such as ordering the insurance company to pay a claim or imposing fines.

If the exclusion is valid and the claim is not covered under your policy, you may be personally responsible for paying any damages or legal costs associated with the claim. In this situation, it's important to consider your options and to consult with an attorney if necessary.

While this response has some okay isolated statements, overall I would rate it: malpractice.  I’ll take it point by point:

1.     Review the policy: Make sure you understand the specific exclusion and its terms. You may want to review the policy documents and any relevant laws or regulations.

This may work for the simplest exclusions, but even then I wouldn’t bet on it.  If you have a homeowner’s policy that excludes – let me make up a good one here – “damages arising out of the ownership of dinosaurs,” and you have a pet dinosaur that eats your plumbing, resulting in water damage, it might seem obvious that the exclusion excludes coverage. Right?

Well, not necessarily.  What part of the policy lists the exclusion?  If the exclusion is within your property coverage – which covers damage to your own house – it might apply.  But if it’s in your liability coverage – which covers injuries or property damage you cause to someone else – it might not apply. 

Even if the exclusion is in the relevant portion of the policy, are their any exceptions to the exclusion?  Or any limitations to it?  Or has it been removed altogether?  Your policy may have thirty different forms and endorsements, and language affecting the exclusion may be in a different endorsement than the exclusion itself.

And what about the courts?  Have they interpreted the exclusion?  What have they concluded?

If you have been told that an exclusion applies, don’t try to figure it out yourself.  Consult an attorney who specializes in insurance coverage issues. 

2.   Negotiate with the other party: If you believe that the exclusion should not apply, you may try to negotiate with the other party to reach a settlement.

WRONG.  This would only be correct if the “other party” is the insurance company – but typically the other party is the party who is suing you, for which you are seeking insurance coverage.  If you believe the exclusion does not apply, you need to deal with the insurance company on coverage, not settle with the other party.  Again, hire an attorney.

3.  Hire an attorney: If you are unable to resolve the issue with the other party, you may want to consider hiring an attorney who specializes in insurance law. An attorney can help you understand your rights and options and represent you in negotiations or in court.

This is good advice, except for the order.  Hire an attorney first. 

4.     File a complaint with the Massachusetts Division of Insurance: If you are dissatisfied with the insurance company's decision, you may file a complaint with the Massachusetts Division of Insurance. This agency can investigate the matter and take appropriate action, such as ordering the insurance company to pay a claim or imposing fines.

This is technically true.  I have known people to have good results requesting the assistance of the Division of Insurance, more often with health insurance than with liability insurance.  If you file a complaint with the Division and it catches the attention of a staffer who decides that they agree you have been wronged, they may make a phone call or send a letter that will intimidate the insurer into backing down.  But the Division will not get involved in a dispute over the meaning of an insurance exclusion that is best left to the  courts.  Also, be aware that the Division will not work with a policyholder who is represented by counsel.  You can go to the Division and later, if you’re not satisfied with the results there, hire an attorney.  But you can’t do it the other way around. 

If the exclusion is valid and the claim is not covered under your policy, you may be personally responsible for paying any damages or legal costs associated with the claim. In this situation, it's important to consider your options and to consult with an attorney if necessary.

Agreed. 

My verdict:  The results from ChatGPT are significantly worse than you would get from a Google search -- which will generally lead you to coverage attorneys -- and may cause you to lose rights under your policy or pay a claim that should be covered by insurance.  

SJC holds that under plain language of pollution policy there is no coverage for costs incurred to prevent business interruption after pollution event

 

Ken's Foods, Inc. operates a manufacturing facility in Georgia.  In 2018 its wastewater treatment system malfunctioned and wastewater flowed into a Georgia tributary.  Ken's Foods cleaned up and contained the pollution, incurring about $1 million in costs.

Ken's Foods also implemented a temporary wastewater treatment system that allowed it to continue its operations without interruption.  It spent over $2 million on these measures, including governmental fines, which allowed it to avoid a suspension of operations that otherwise would have cost it over $10 million per month in expenses and lost profits.  

Ken's Foods sought coverage under a pollution liability policy issued to it by Steadfast Insurance Company.  Steadfast paid costs incurred in cleaning up the wastewater discharge and denied coverage for the costs incurred to avoid suspending operations.  

    Policy provisions

Coverage C of the Steadfast policy covered the costs of remediating contamination and legal claims arising from a pollution event, including "emergency expenses," that is, "costs, charges and expenses incurred to avoid an actual imminent and substantial endangerment to the public health or welfare or the environment."  

Coverage H of the policy covered loss of business income resulting from a pollution event that caused a "suspension of operations," which was defined as "necessary partial or complete suspension of operations at the covered location as a direct result of a cleanup required by a governmental authority."  The policy provided that Steadfast was responsible for such losses from four days after a notification of a suspension until Ken's Foods could resume operations.  Under this coverage, Ken's Foods was required to mitigate loss of business income, complete cleanup, and resume operations as soon as practicable in the event of a suspension of operations. 

    Certified question

Ken's Foods sued Steadfast in federal court.  The United States Court of Appeals for the First Circuit certified the question to the Supreme Judicial Court of Massachusetts: "To what extent, if any, does Massachusetts recognize a common-law duty for insurers to cover costs incurred by an insured party to prevent imminent covered loss, even if those costs are not covered by the policy?"  

    No coverage under the express terms of the policy

In Ken's Foods, Inc. v. Steadfast Insurance Co., the SJC responded today (January 6, 2023; published opinion not available yet) that costs incurred by Ken's Foods to prevent a suspension of operations were not recoverable under the policy, because there was no suspension of operations. Rather, Ken's Foods avoided a partial or complete suspension by implementing process changes and negotiating pollution allowances and accompanying fines with the county authority.  "These very measures showed that a partial or complete shutdown was not 'necessary,' albeit due to the creative response of Ken's Foods and the flexibility of government regulators."  

The court held that the mitigation of loss provision of Coverage H was inapplicable.  That provision also required a suspension of operations, which did not occur.  The provision did not require Ken's Foods to prevent an imminent suspension of operations or require reimbursement of such costs.  

    No coverage under common law

As a question of first impression in Massachusetts, the court held that Ken's Food did not have a common law right to reimbursement for the costs incurred to prevent a suspension of operations.  The court noted that this there is a division of opinion among other jurisdictions on this question.

The SJC contained its ruling to the language of the policy and stated that it was not addressing whether there can ever be a common law right to reimbursement -- although under its analysis, there can never be such a right if not set forth in the policy. The court held that the plain, unambiguous language of the policy and the rules for policy interpretation, as  it had already discussed, did not provide for coverage for preventative costs.  

    "Asymmetry" of coverage does not change analysis

In a footnote the court addressed Ken's Foods' argument that the lack of a duty of an insurer to pay for preventive costs creates an asymmetry:  If Ken's Foods had not taken preventative measures, Steadfast would have argued that it had failed to mitigate damages as required by the policy.  The court held, "However this is an asymmetry created by the text of the contract itself."  It quoted Williston on Contracts:  "The question whether a bargain is smart or foolish, or economically inefficient or disastrous, is not ordinarily a legitimate subject of judicial inquiry."