{"id":2642,"date":"2015-01-06T18:08:53","date_gmt":"2015-01-06T18:08:53","guid":{"rendered":"https:\/\/www.sblegal.ca\/?p=2642"},"modified":"2026-04-01T18:26:58","modified_gmt":"2026-04-01T18:26:58","slug":"pestmaster-u-s-district-court-affirms-fidelity-insurers-intent-on-scope-of-computer-fraud-and-funds-transfer-fraud-coverages","status":"publish","type":"fidelityblog","link":"https:\/\/www.sblegal.ca\/wordpress\/fidelity-blog\/pestmaster-u-s-district-court-affirms-fidelity-insurers-intent-on-scope-of-computer-fraud-and-funds-transfer-fraud-coverages\/","title":{"rendered":"Pestmaster: U.S. District Court affirms Fidelity Insurer\u2019s Intent on Scope of Computer Fraud and Funds Transfer Fraud Coverages"},"content":{"rendered":"

In\u00a0Pestmaster Services, Inc. v. Travelers Casualty and Surety Company of America<\/em>, the U.S. District Court for the Central District of California granted partial summary judgment in favour of Travelers on a claim advanced under its Computer Fraud and Funds Transfer Fraud coverages.\u00a0 The decision provides valuable guidance regarding the scope of these coverages.<\/p>\n

The Facts<\/strong><\/h3>\n

Pestmaster, a pest control business, was insured under a Travelers Wrap+ policy.\u00a0 In 2009, Pestmaster hired a payroll company, Priority, to handle its payroll and payroll tax obligations.\u00a0 Pestmaster executed an ACH authorization which authorized Priority to obtain payment of Priority\u2019s approved invoices by initiating ACH transfers of funds from Pestmaster\u2019s bank account to Priority\u2019s bank account.\u00a0 These amounts included both payroll and payroll taxes, the latter of which Priority was supposed to remit to the IRS.<\/p>\n

In 2011, Pestmaster discovered that Priority had failed to remit $373,000 in payroll taxes, and had instead diverted these funds to its own uses.\u00a0 Pestmaster sought indemnity from Travelers under its Funds Transfer Fraud coverage or, alternatively, its Computer Fraud coverage.<\/p>\n

Funds Transfer Fraud<\/strong><\/h3>\n

The Funds Transfer Fraud coverage indemnified Pestmaster for direct loss of money or securities, contained in its transfer account on deposit at a financial institution, directly caused by Funds Transfer Fraud.\u00a0 Funds Transfer Fraud was, in turn, defined as (in relevant part):<\/p>\n

an electronic, telegraphic, cable, teletype or telephone instruction fraudulently transmitted to a Financial Institution directing such institution to debit your Transfer Account and to transfer, pay or deliver Money or Securities from your Transfer Account which instruction purports to have been transmitted by you, but was in fact fraudulently transmitted by someone other than you without your knowledge or consent;<\/em><\/p>\n

Pestmaster contended that Priority\u2019s transferring funds from Pestmaster\u2019s bank account to its own bank account, in furtherance of Priority\u2019s fraudulent scheme, constituted a fraudulent instruction to Pestmaster\u2019s bank.<\/p>\n

The Court rejected Pestmaster\u2019s contention, holding that the insuring agreement does not cover authorized or valid transactions, such as the authorized ACH transfers in this case, even where such transactions are associated with an underlying fraudulent scheme.\u00a0 The Court found that there was no evidence that Priority had gained unauthorized access to Pestmaster\u2019s bank\u2019s electronic fund transfer system or had otherwise provided any fraudulent or altered instructions to the bank in order to divert funds from the rightful recipient.\u00a0 As Priority wrongfully converted the funds only\u00a0after\u00a0they had been transferred to Priority, pursuant to Pestmaster\u2019s express authorization, the elements of the Funds Transfer Fraud coverage were not made out.<\/p>\n

The Court accepted Travelers\u2019 position that the intention of the coverage is to protect the insured or its bank from someone breaking into the electronic funds transfer system and pretending to be an authorized representative, or altering electronic instructions to divert funds from the rightful recipient.<\/p>\n

Computer Fraud Coverage<\/strong><\/h3>\n

The Computer Fraud coverage indemnified Pestmaster for direct loss of money, securities or other property directly caused by Computer Fraud, i.e., the use of a computer to cause a transfer of money, securities or other property from inside the insured\u2019s premises or the insured\u2019s bank\u2019s premises.<\/p>\n

Pestmaster contended that Priority\u2019s use of a computer to transfer funds from Pestmaster\u2019s bank account to Priority\u2019s bank account, in furtherance of Priority\u2019s fraudulent scheme, met the requirements of the coverage.<\/p>\n

The Court rejected this contention as well, accepting Travelers\u2019 position that the Computer Fraud coverage is engaged when someone \u201chacks\u201d or obtains unauthorized access or entry to a computer in order to make an unauthorized transfer of funds.\u00a0 The Court relied on\u00a0Universal American<\/em>, a 2013 New York decision in which a computer was used to submit fraudulent health insurance claims.\u00a0 The\u00a0Universal American<\/em>\u00a0court had concluded that Computer Fraud coverage did not apply \u201cwhere an authorized user utilized the system as intended, i.e., to submit [health insurance] claims, but where the claims themselves were fraudulent<\/em>.\u201d<\/p>\n

The Court concluded that Priority had acted pursuant to Pestmaster\u2019s ACH authorization, and could not in any sense be considered a \u201chacker\u201d or unauthorized user.\u00a0 Priority\u2019s fraudulent conduct occurred only after the authorized transfer had been completed and the funds had already been transferred into Priority\u2019s account.<\/p>\n

No Direct Loss<\/strong><\/h3>\n

The Court also held, as alternative bases for denying coverage, that Priority\u2019s use of its computer was merely incidental to, and not directly related to, Pestmaster\u2019s losses, and that Pestmaster had not satisfied the \u201cdirect loss\u201d requirement in either of the coverages.\u00a0 Rather, Pestmaster\u2019s loss was \u201centirely contingent on a series of events and decisions, including Priority 1\u2019s decision to divert the funds in its account to pay its own obligations instead of using them for their agreed upon purpose of paying Pestmaster\u2019s federal payroll taxes.<\/em>\u201d<\/p>\n

The\u00a0Pestmaster<\/em>\u00a0decision is helpful in explaining (and endorsing) fidelity insurers\u2019 intentions as to the proper scope of the Computer Fraud and Funds Transfer Fraud coverages, confirming that the coverage is intended to be limited to unauthorized access and \u201chacking\u201d situations.\u00a0 The decision is also helpful in rebutting arguments which attempt to create coverage by reliance on the merely-incidental involvement of a computer, or an electronic transfer, in the loss scenario.<\/p>\n

Pestmaster Services, Inc. v. Travelers Casualty and Surety Company of America<\/em>, 2014 WL 3844627 (C.D. Cal.)<\/p>\n","protected":false},"excerpt":{"rendered":"

In\u00a0Pestmaster Services, Inc. v. Travelers Casualty and Surety Company of America, the U.S. District Court for the Central District of California granted partial summary judgment in favour of Travelers on a claim advanced under its Computer Fraud and Funds Transfer Fraud coverages.\u00a0 The decision provides valuable guidance regarding the scope of these coverages. The Facts … Continued<\/a><\/p>\n","protected":false},"featured_media":2618,"template":"","fidelityblog-category":[],"class_list":["post-2642","fidelityblog","type-fidelityblog","status-publish","has-post-thumbnail","hentry"],"acf":[],"yoast_head":"\nPestmaster: U.S. District Court affirms Fidelity Insurer\u2019s Intent on Scope of Computer Fraud and Funds Transfer Fraud Coverages - Stieber Berlach<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.sblegal.ca\/wordpress\/fidelity-blog\/pestmaster-u-s-district-court-affirms-fidelity-insurers-intent-on-scope-of-computer-fraud-and-funds-transfer-fraud-coverages\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Pestmaster: U.S. District Court affirms Fidelity Insurer\u2019s Intent on Scope of Computer Fraud and Funds Transfer Fraud Coverages - Stieber Berlach\" \/>\n<meta property=\"og:description\" content=\"In\u00a0Pestmaster Services, Inc. v. Travelers Casualty and Surety Company of America, the U.S. District Court for the Central District of California granted partial summary judgment in favour of Travelers on a claim advanced under its Computer Fraud and Funds Transfer Fraud coverages.\u00a0 The decision provides valuable guidance regarding the scope of these coverages. 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