On September 19, 2023, the U.S. District Court for the District of Massachusetts released its decision in Brooks & Derensis, P.C. v. Twin Cities Fire Insurance Co. The Court held that no coverage was available to a law firm that transferred funds out of its trust account on the strength of a cashier’s cheque which turned out to be forged.
The Court reviewed two discrete, but similar, forgery coverages in the insured’s package policy, and concluded that the cashier’s cheque in issue did not meet the elements of coverage for either insuring agreement and was therefore not a qualifying instrument. The Court also relied on one coverage’s False Pretenses exclusion to find that the loss would otherwise have been excluded.
The decision demonstrates the correct approach to analyzing a Forgery claim under Commercial Crime Policy-like language. The claims professional must be satisfied that the instrument in issue meets the specific requirements of the coverage grant (a “qualifying instrument”), in addition to being satisfied that there is a qualifying impairment such as forgery or alteration, and that the causation requirement has been met in the circumstances.
The Facts
The insured (“B&D”) is a law firm. In 2021, B&D was retained by an individual who called himself Brian Rodriguez (“Rodriguez”) to secure money purportedly owed to Rodriguez by his employer under the terms of a severance agreement. Rodriguez emailed the employer asking that payment of the amount owed to him be directed to B&D within a week. Shortly thereafter, B&D received a cashier’s cheque drawn upon Wells Fargo Bank, N.A. in the amount of $89,960 with a letter apparently prepared by the employer’s Chief Financial Officer explaining the reason for the payment.
On October 28, 2021, B&D deposited the cashier’s cheque into its IOLTA account held with Cambridge Trust Bank. On November 3, 2021, B&D transferred $88,385 to an account at Citibank in accordance with Rodriguez’s instruction. The following day, B&D received a letter from Wells Fargo Bank N.A. dishonouring the cashier’s cheque as an “Altered/Fictitious Item.”
B&D maintained a package policy with Twin Cities which included two types of forgery-related coverages, one under a general Amendatory Endorsement and the other under a Forgery Coverage Form. Twin Cities concluded that the claimed loss did not meet the requirements of either of the insuring agreements, and relied on exclusory language in the Amendatory Endorsement. B&D commenced an action seeking indemnity under the policy. Twin Cities moved to dismiss the action for failure to state a claim upon which relief can be granted (analogous to a rule 21.01(1)(b) motion in Ontario).
The Forgery Coverages
The first Forgery Coverage (under the Forgery Coverage Form) indemnified B&D 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 by or drawn upon you;
(2) Made or drawn by one acting as your agent; or that are purported to have been so made or drawn.
This language is similar to many forms of Forgery insuring agreements, including the 2012 ISO Commercial Crime Policy (Discovery Form). Twin Cities contended that coverage was unavailable because the cashier’s cheque in issue was “neither ‘made or drawn by [the Plaintiff]’ nor ‘drawn upon [the Plaintiff].’”
The Court agreed, holding that:
Taking the factual allegations in the complaint as true, B&D received a forged cashier’s check from a third-party purporting to be Rodriguez’s employer. As a cashier’s check, it was purportedly made or drawn by and drawn upon Wells Fargo, N.A. B&D was the payee or the bearer in this circumstance, not the maker, drawer or drawee. [citations omitted]
The second Forgery Coverage (under the Amendatory Endorsement) indemnified B&D for “loss resulting directly from forgery or alteration of any check … that you or your agent has issued, or that was issued by someone who impersonates you or your agent”. Twin Cities contended that the dishonoured cashier’s cheque was not issued by B&D, B&D’s agent, or someone pretending to be B&D or its agent, and thus was not covered by the language in the Amendatory Endorsement. The Court noted that B&D did not address Twin Cities’ argument, and held that “B&D has not met its burden to establish coverage on this ground.”
The Court also considered whether the Amendatory Endorsement’s False Pretenses exclusion applied. This exclusion provided that:
[Twin Cities] will not pay for 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, device or false pretense.
The Court held that this exclusion applied to loss claimed under the Amendatory Endorsement:
This exclusion addresses a scenario where the insured willingly transfers funds to a third-party based on some false representation or receipt of a false check. … B&D’s loss falls into this exclusion. [citations omitted]
Consequently, no coverage was available to B&D under the policy.
Conclusion
Brooks & Derensis is a good example of the proper analytical approach to a Forgery claim under Commercial Crime Policy-like language. Forgery insuring agreements require a qualifying instrument in addition to a qualifying impairment and the satisfaction of a causation element. Too often, claims are submitted on the basis that there has been a forgery or alteration of some form of commercial paper or other document, without much consideration as to whether the document allegedly bearing the forgery or alteration is a qualifying instrument.
The facts of Brooks & Derensis provide a good illustration of the principle underlying the language. The Forgery Coverage Form’s insuring agreement indemnified in respect of cheques “Made or drawn by or drawn upon” the insured or its agent. So long as qualifying instruments are restricted primarily to cheques over which the insured exercises some control (as maker, drawer or drawee), the corresponding risk can generally be underwritten by reference to the insured’s own operations and controls. The insuring agreement quite deliberately does not encompass cheques in which the insured is the payee – a much broader class of risk involving materially different underwriting considerations.
Brooks & Derensis, P.C. v. Twin Cities Fire Insurance Co., 2023 WL 6127160 (D.Mass.)