United States: Computer Fraud: Two Similar Scams, Two Very Different Insurance Outcomes

Last Updated: September 6 2017
Article by William T. O’Neil

Two recent decisions by two different federal courts interpreting "Computer Fraud" insurance coverage reveal the limitations of cyber insurance in a rapidly changing cybersecurity landscape. Two businesses fell victim to fraudulent email tricks (known as "spoofing" or disguising an email to look as if it came from someone else) and ended up sending large amounts of money to unknown third parties, who quickly disappeared. Both turned to their "Computer Fraud" insurance coverage, and despite the apparent similarities in their claims and insurance policies, one court determined that the claim was covered while the other court did not. In the end, specific facts of the claims, slight differences in policy wording, and even the forum in which the cases are heard, can be the difference between a covered claim and a large cyber loss borne by an insured business.

I.  Two Similar Computer Frauds

In the first case, Medidata Solutions fell victim to a spoofing scam in September 2014. See Medidata Solutions Inc. v. Federal Ins. Co., No. 15-CV-907 (S.D.N.Y., July 21, 2017). As part of the scam, a third party was able to send multiple Medidata employees emails that looked like they came from the company president, even including his picture in the "from" field. The initial emails notified an employee in the finance group to expect a phone call from an outside attorney. An employee later received such a call, requesting that she initiate a wire transfer. The employee notified the scammer that she needed approval for such a transfer from the company President, Vice President and Director of Revenue. The Vice President and Director of Revenue then received a second fake email from the President, again displaying his correct email address and picture in the "from" field, instructing them to approve the wire transfer. On this instruction, the executives approved the wire payment of $4.7 million. A second attempt was made four days later, but this time the employees noticed that when replying to the President's e-mail, a "suspicious" e-mail address appeared in the "Reply to" field. A new email to the President revealed that he had never sent any of the authorizing emails, and the company contacted the FBI.

In the second case, a hack at American Tooling Center ("ATC") followed a similar course. See American Tooling Center, Inc. v. Travelers Cas. & Sur. Co., No. 16-12108 (E.D. Mich., August 1, 2017). ATC, a tool and die manufacturer out of Michigan, subcontracts some of its project to a Chinese vendor YiFeng. The standard practice was for YiFeng to submit invoices for completed work to ATC by email, which ATC paid by wire transfer. In March 2015, ATC contacted YiFeng for a list of outstanding invoices. The reply email told ATC to send wire payments for several legitimate outstanding invoices to a new bank account. The reply had come from a third party, who was able to make the email look as if it had come from YiFeng, as had been done in Medidata. ATC wired $800,000 to the new account, which promptly disappeared.

II.  Two Markedly Different Rulings

Both companies submitted claims for their losses to their insurance companies, and both claims were promptly denied. Both insureds filed suit in federal court – Medidata against Federal Insurance Company in the Southern District of New York and ATC against Travelers Casualty in the Eastern District of Michigan.   There their fortunes diverged.

Medidata's policy with Federal was labeled a "Federal Executive Protection" policy. The policy contained a "Crime Coverage Section" that included subsections for "Computer Fraud Coverage," "Funds Transfer Fraud Coverage," and "Forgery Coverage." The "Computer Fraud Coverage" provided coverage for the "direct loss of Money, Securities or Property sustained by an Organization resulting from Computer Fraud committed by a Third Party." "Computer Fraud" was defined as "the fraudulently induced transfer of Money, Securities or Property resulting from a Computer Violation." "Computer Violation" was defined as "the fraudulent (a) entry of Data into ... a Computer System." Federal denied the claim arguing that there was no "fraudulent entry of Data into Medidata's computer system." Since the emails were sent to an inbox authorized to receive such messages, the insurer argued that the entry of that email to the computer was authorized and therefore the loss not covered.

The court rejected this argument, ruling that the third party sending the email in Medidata was not an authorized user of the company email system, and his fraudulent activity met the standard of a "Computer Violation." The court noted that consistent with earlier New York precedent, the policy provided coverage for "fraud where the perpetrator violates the integrity of a computer system through unauthorized access" but did not provide coverage "for fraud caused by the submission of fraudulent data by authorized users."

Federal also argued that there was no "direct nexus" between the fraudulent email and the wire transfer, as the policy requires a "direct loss ... resulting from Computer Fraud." The court disagreed with a Fifth Circuit ruling in Apache Corp. v. Great American Ins. Co., 662 F.App'x 252 (5th Cir. 2016), that had denied coverage for a scam that included spoofed emails because the loss was not directly tied to the Computer Fraud. Instead, the court ruled that the "Medidata employees only initiated the transfer as a direct cause of the thief sending spoof emails posing as Medidata's president" and therefore the loss was "directly" tied to the fraud (and despite the fact that the scheme also included at least one phone call).

ATC argued many of the same claims to much different results. The Travelers policy covered "computer crime" with the provisions stating "[t]he Company will pay the Insured for the Insured's direct loss of ... Money, Securities and Other Property directly cause by Computer Fraud." "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 ... (1) to a person ... outside the Premises ...; or (2) to a place outside the Premises ...." As in Medidata, the insurer argued that the loss was not a direct result of the fraud. The ATC court, in contrast to the Medidata ruling, highlighted that between receipt of the fraudulent emails and the wire transfer, the insured had confirmed the production milestones that justify payment, authorized the transfers and initiated the transfers. These "intervening events" were relied upon to find that the transfers were not the "direct" result of the fraud. The ATC court relied on a prior Sixth Circuit ruling that had held the word "directly" meant "immediate" and "without anything intervening" under Michigan law. Of course, the Medidata employees had done much the same thing, and yet there the court held that the loss was a direct result of the fraud.

The ATC court attempted to distinguish the Medidata ruling by claiming that the policy language of the two policies were different, and that Medidata's coverage did not have the "directly caused by Computer Fraud" language. Medidata's policy did require the "direct loss of Money," but it did not reuse "directly" again before the term "Computer Fraud." The differences in the policy language appear to be ever so slight, but that difference appears to have been determinative in the coverage (or lack thereof) of the claim.

The Michigan court's holding in ATC would appear to severely restrict coverage for a most common method of computer fraud, and require, without specifically saying so in the policy, that coverage only exists if the fraudulent party reaches into an insured's account and removes the funds itself. But of course that's not how con artists work. You only have to remember the final scenes of "The Sting," where Doyle Lonnegan hands over his cash to bet on a sure thing. Had Lonnegan made his bet in Detroit rather than New York City, he would have lost a second time.

III.  Lessons Learned

Computer Fraud is a quickly changing problem, with scammers showing new methods of stealing, swindling or holding data hostage seemingly every month. The victims include television networks, hospitals, online retail providers and governments. In fact anyone using a computer network is susceptible, even the NSA.

Engaging your insurance brokers in a conversation about the types of fraud that appear in the news is the first step, but that is not enough. Understanding how Courts treat various insurance clauses must be taken into consideration as well.   Coverage should not be narrowly tailored to address last year's problem.   Rather, it should be negotiated to cover current scams, taking into account recent insurance decisions as well. Understanding how computer fraud coverage interacts with other types of cyber crime policies is also essential, because as these types of coverage mature the Courts can severely limit their application in the real world.

Finally, at the point of claim, businesses often get conflicting or incorrect advice concerning coverage. How claims are approached makes a big difference in whether they are ultimately covered or not, and an understanding of the law is critical to maximizing coverage. Getting a claim reviewed by experienced coverage counsel early in the process gives the insured an independent analysis taking into account the latest developments in coverage law, even those decisions that are not necessarily about the same types of coverage at issue but that can be critical in determining coverage.

Miller Friel, PLLC is a specialized insurance coverage law firm whose sole purpose is to help corporate clients maximize their insurance coverage. Our Focus of exclusively representing policyholders, combined with our extensive Experience in the area of insurance law, leads to greater efficiency, lower costs and better Results. Further discussion and analysis of insurance coverage issues impacting policyholders can be found in our Miller Friel Insurance Coverage Blog and our 7 Tips for Maximizing Coverage series.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions