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:
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
(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.