American Tooling Center, Incorporated v. Travelers Casualty and Surety Company of America
OPINION AND ORDER denying 21 Motion for Summary Judgment; granting 22 Motion for Summary Judgment. Signed by District Judge John Corbett O'Meara. (WBar)
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
AMERICAN TOOLING CENTER,
INC., a Michigan corporation,
Case No. 16-12108
Hon. John Corbett O’Meara
TRAVELERS CASUALTY AND
SURETY COMPANY OF AMERICA,
a Connecticut domiciled insurance
OPINION AND ORDER GRANTING DEFENDANT’S
MOTION FOR SUMMARY JUDGMENT AND
DENYING PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT
Before the court are the parties’ cross-motions for summary judgment. For
the reasons explained below, Defendant’s motion is granted and Plaintiff’s motion
Plaintiff, American Tooling Center, Inc. (“ATC”), seeks to recover under an
insurance policy issued by Defendant, Travelers Casualty and Surety Company of
America (“Travelers”). After receiving emails that appeared to be from one of its
vendors, ATC authorized payments to a bank account it believed belonged to the
vendor. The emails were fraudulent, however, and the payments were received by
the fraudsters, not ATC’s vendor. ATC contends that it suffered a loss that is
covered under the “computer fraud” provision of its Travelers insurance policy.
Travelers argues that ATC did not incur a covered loss under the policy.
ATC is a tool and die manufacturer, which outsources some of its work to
other die manufacturing companies overseas. One of those vendors is Shanghai
YiFeng Automotive Die Manufacture Co., Ltd. (“YiFeng”). ATC typically issues
purchase orders to YiFeng, which then manufactures the dies. ATC sends payment
to YiFeng in stages, reflecting certain completion milestones. To receive payment,
YiFeng submits an invoice for each milestone by email. ATC verifies that the
milestone is met, then pays the invoices by initiating wire transfers from its
Comerica bank account to YiFeng’s bank account.
On March 18, 2015, ATC’s Vice President/Treasurer, Gary Gizinski, sent an
email to his contact at YiFeng, requesting copies of all outstanding invoices. In
response, Gizinski received an email purportedly from YiFeng, but which was
actually sent by a third party. (The third party made the email appear to be from
YiFeng by using the “yifeng-rnould” domain, which is easily confused for the
correct domain: “yifeng-mould.com”). The third party, pretending to be from
YiFeng, instructed ATC to send payment for several legitimate outstanding
invoices to a new bank account. Without verifying the new banking instructions,
ATC wire transferred approximately $800,000 to a bank account that was not
controlled by YiFeng. By the time the fraud was detected, the funds had been
transferred and the wire transfers could not be retracted. YiFeng did not receive
payment for the invoices, although ATC eventually paid YiFeng about 50% of the
invoice amounts, or about $400,000.
ATC filed a claim under its Travelers insurance policy, which was denied.
Travelers contends that ATC’s loss was not a “direct loss” that was “directly
caused by the use of a computer,” as required by the policy. The policy covers
“computer crime” as follows: “The Company will pay the Insured for the
Insured’s direct loss of, or direct loss from damage to, Money, Securities and
Other Property directly caused by Computer Fraud.” Pl.’s Ex. A (emphasis in
original). “Computer Fraud” is defined as
The use of any computer to fraudulently cause a transfer
of Money, Securities or Other Property from inside the
Premises or Financial Institution Premises:
to a person (other than a Messenger)
outside the Premises or Financial
Institution Premises; or
to a place outside the Premises or
Financial Institution Premises.
Id. (emphasis in original).
LAW AND ANALYSIS
The parties do not dispute the material facts, but disagree regarding whether
ATC has suffered a covered loss under the Travelers policy. Summary judgment is
appropriate if “there is no genuine issue as to any material fact and . . . the moving
party is entitled to a judgment as a matter of law.” Fed. R. Civ. P. 56(c).
The parties agree that this diversity action is governed by Michigan law.
Initially, in reviewing an insurance policy dispute we
must look to the language of the insurance policy and
interpret the terms therein in accordance with Michigan’s
well-established principles of contract construction.
First, an insurance contract must be enforced in
accordance with its terms. A court must not hold an
insurance company liable for a risk that it did not assume.
Second, a court should not create ambiguity in an
insurance policy where the terms of the contract are clear
and precise. Thus, the terms of a contract must be
enforced as written where there is no ambiguity.
Henderson v. State Farm Fire & Cas. Co., 460 Mich. 348, 353-54, 596 N.W.2d 190
(1999) (citations omitted).
Travelers contends that ATC did not suffer a “direct loss” that was “directly
caused” by “the use of any computer.” ATC received fraudulent emails that were
“spoofed” to appear as though they originated from YiFeng. In response, ATC
verified that certain production milestones had been met, then authorized payment
to the bank account specified in the fraudulent emails. ATC did not attempt to
independently verify the bank account change with YiFeng. Given the intervening
events between the receipt of the fraudulent emails and the (authorized) transfer of
funds, it cannot be said that ATC suffered a “direct” loss “directly caused” by the
use of any computer. The Sixth Circuit, applying Michigan law, has noted that
“direct” is defined as “immediate,” without anything intervening. See Tooling,
Manufacturing & Technologies Ass’n v. Hartford Fire Ins. Co., 693 F.3d 665, 673
(6th Cir. 2012) (“The primary word used to describe ‘directly’ in each of these
definitions is ‘immediate,’ and each of the dictionaries defines ‘directly’ or ‘direct’
as ‘without anything intervening’ or ‘without any intervening space or time ...
agency or instrumentality.’”). Here, the fraudulent emails did not “directly” or
immediately cause the transfer of funds from ATC’s bank account. Rather,
intervening events between ATC’s receipt of the fraudulent emails and the transfer
of funds (ATC verified production milestones, authorized the transfers, and
initiated the transfers without verifying bank account information) preclude a
finding of “direct” loss “directly caused” by the use of any computer.1
Plaintiff urges the court to rely upon Owens, Schine & Nicola, P.C. v. Travelers
Cas. & Sur. Co., 2010 WL 4226958 (Conn. Super. Sept. 20, 2010), which was vacated by
stipulation of the parties, 2012 WL 12246940 (Conn. Super. Apr. 18, 2012). Aside from
its lack of precedential value, Owens is distinguishable. Applying Connecticut law, the
Owens court relied in part on a broader definition of “direct” as synonymous with
“proximate” or “predominate” cause. In contrast, the Sixth Circuit in Tooling predicted
that the Michigan Supreme Court would adopt the narrower “direct is direct” or direct as
“immediate” approach. Tooling, 693 F.3d at 673-76.
In addition, under similar circumstances, courts have found no coverage for
computer fraud. In Apache Corp. v. Great American Ins. Co., 662 Fed. Appx. 252
(5th Cir. 2016), Apache received fraudulent emails purportedly from one of its
vendors, directing it to make payments for legitimate invoices to a criminal’s bank
account. Apache paid the invoices before discovering the fraud. It submitted a
claim to GAIC, asserting coverage under a “computer fraud” provision similar to
the one at issue here. Id. (“We will pay for loss . . . resulting directly from the use
of any computer to fraudulently cause a transfer. . . .”). GAIC denied the claim,
contending that Apache’s loss did not “result directly from the use of any computer
to fraudulently cause a transfer.” Id.
The Fifth Circuit agreed, finding that the mere sending/receipt of fraudulent
emails did not constitute “the use of any computer to fraudulently cause a transfer.”
The court explained:
The email was part of the scheme; but, the email was
merely incidental to the occurrence of the authorized
transfer of money. To interpret the computer-fraud
provision as reaching any fraudulent scheme in which an
email communication was part of the process would . . .
convert the computer-fraud provision to one for general
Further, as supplemental authority, Plaintiffs submitted Medidata Solutions, Inc. v.
Federal Ins. Co., Case No. 15-CV-907 (S.D. N.Y. July 21, 2017). Docket No. 32.
Medidata is distinguishable because the insurance policy does not include the language at
issue here, which requires the “direct loss” to be “directly caused by Computer Fraud.”
Apache, 662 Fed. Appx. at 258 (citation omitted).
Although fraudulent emails were used to impersonate a vendor and dupe
ATC into making a transfer of funds, such emails do not constitute the “use of any
computer to fraudulently cause a transfer.” There was no infiltration or “hacking”
of ATC’s computer system. The emails themselves did not directly cause the
transfer of funds; rather, ATC authorized the transfer based upon the information
received in the emails. The Ninth Circuit has interpreted the phrase “fraudulently
cause a transfer” to “require the unauthorized transfer of funds.” Pestmaster Servs.,
Inc. v. Travelers Casualty & Surety Co. of America, 656 Fed. Appx. 332 (9th Cir.
2016). “Because computers are used in almost every business transaction, reading
this provision to cover all transfers that involve both a computer and fraud at some
point in the transaction would convert this Crime Policy into a ‘General Fraud’
Policy.” Id. See also Incomm Holdings, Inc. v. Great American Ins. Co., 2017 WL
1021749 *10 (N.D. Ga. Mar. 16, 2017) (noting that “courts repeatedly have denied
coverage under similar computer fraud provisions, except in cases of hacking
where a computer is used to cause another computer to make an unauthorized,
direct transfer of property or money”).
For these reasons, the court finds that ATC did not suffer a “direct loss” that
was “directly caused by computer fraud” and that there is no coverage under the
Accordingly, IT IS HEREBY ORDERED that American Tooling Center’s
motion for summary judgment is DENIED.
IT IS FURTHER ORDERED that Travelers Casualty and Surety Company
of America’s motion for summary judgment is GRANTED.
s/John Corbett O’Meara
United States District Judge
Date: August 1, 2017
I hereby certify that a copy of the foregoing document was served upon
counsel of record on this date, August 1, 2017, using the ECF system.
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