United States: Eleventh Circuit Affirms No Coverage Under Computer Fraud Provision Of Insurance Policy

Last Updated: May 14 2018
Article by Robert MacAneney and John C. Pitblado

On May 10, the U.S. Court of Appeals for the Eleventh Circuit affirmed the decision of the U.S. District Court for the Northern District of Georgia in InComm Holdings, Inc. v. Great American Insurance Company. The Eleventh Circuit agreed that Great American's computer fraud coverage did not apply to holders of prepaid debit cards who exploited a coding error in the insured's computer system and fraudulently increased the balances on the cards which caused InComm to incur a loss of $11.4 million.

Background Facts

InComm operates a network that allows consumers to put money onto general-purpose reloadable debit cards issued by banks. In particular, InComm sells "chits" to consumers, which they can then use to transfer funds to their cards. After purchasing a chit at a retailer, a consumer can simply call InComm to redeem the chit and have its value moved over to his card. When a consumer dials InComm's 1-800 number to redeem a chit, he is connected to InComm's interactive voice response (IVR) computer system. The IVR system uses eight computers that process voice requests or telephone touch-tone codes. To redeem a chit through InComm's IVR, a consumer enters his debit card number and the PIN located on the back of the chit. The IVR then credits the value of the chit to the card, and the funds become immediately available to the cardholder. After making the funds available for use, InComm is contractually obligated to transfer money, equivalent to the value of the redeemed chit(s), to the bank that issued the debit card. 

Fraudsters exploited a vulnerability in InComm's IVR system that enabled multiple redemptions of a single chit. Specifically, the fraudsters figured out that they could redeem a single chit multiple times by making two or more concurrent calls to the IVR system and simultaneously requesting the redemption of a particular chit. One call would transfer the funds from the chit to the debit card account, while the other would return the chit to an "unredeemed" state, allowing it to be redeemed again. Over seven months, InComm's system processed 25,553 fraudulent redemptions associated with 1,988 individual chits, totaling $11.4 million in fraudulent redemption.\

The Computer Fraud Coverage

InComm submitted a claim under the computer fraud coverage of an insurance policy issued to it by the defendant, Great American Insurance Company. The policy language at issue provides coverage for: 

"loss of, and loss from damage to, money, securities and other property resulting directly from the use of any computer to fraudulently cause a transfer of that property from inside the premises or banking premises: (a) to a person (other than a messenger) outside those premises; or (b) to a place outside those premises." 

The district court focused on whether a "computer" was "used" in connection with the fraud. First, the court analyzed whether a telephone counts as a "computer." Despite the successful hacking of NORAD by Mathew Broderick's character in the movie War Games from a pay phone, the district court held that a telephone was "a completely different device." It stated that a "telephone" is not a "computer" regardless of whether the phone may have been connected to a computer system. Next, the court analyzed whether a computer was "used" in connection with the fraud. It reasoned that "[a] person thus 'uses' a computer where he takes, holds or employs it to accomplish something. That a computer was somehow involved in a loss does not establish that the wrongdoer 'used' a computer to cause the loss."

Citing Pestmaster Servs., Inc. v. Travelers Cas. & Sur. Co. of Am., 656 Fed. Appx. 332 (9th Cir. July 29, 2016), and Apache Corp. v. Great Am. Ins. Co., 662 Fed. Appx. 252 (5th Cir. Oct. 18, 2016), the court also held that the fraud did not result "directly" from the "use of any computer" since it was largely committed using telephones. 

The district court stated:

In the end, InComm's loss resulted directly—that is, immediately—from InComm's decision to wire the funds to Bancorp, not from the cardholders' redemptions. Apache, and the cases it discusses, warn that to find coverage based on the use of a computer, without a specific and immediate connection to a transfer, would effectively convert a computer fraud provision into a general fraud provision. See Apache Corp. v. Great Am. Ins. Co., 662 F. App'x 252, 258 (5th Cir. 2016).

InComm Holdings, Inc. v. Great American Insurance Company, Case 1:15-cv-02671-WSD, May 10, 2018, p.35

The Eleventh Circuit affirmed, although it disagreed with the district court on whether the scheme involved the "use" of a "computer." The Eleventh Circuit Court stated that "the fraudsters interfaced directly with the IVR computer system to effectuate their duplicate redemptions. Thus, we conclude that the fraud against InComm was perpetrated through the 'use of a[] computer' within the terms of its insurance policy." Id. at 8.

It nevertheless affirmed, however, agreeing with the district court that the loss did not "directly" result from the use of a computer. Id. at 8-14.

The Beginning of a Trend? 

While the InComm case does not involve a "social engineering" or "business email compromise" fraud, as many of the recent insurance coverage cases grabbing the headlines in this space have, it is nevertheless instructive on some of the key issues that are common in these coverage disputes. Both insurers and insureds alike must recognize the need to laser focus on the precise terms employed in these policies to determine the scope of coverage, particularly given the ever-changing schemes employed by fraudsters using phones, as in this case, or using unsuspecting employees, as in the case of social engineering losses, regardless of whether those targets are connected in some fashion to a company's computer system. Like the Fifth and Ninth Circuits before it, the Eleventh Circuit has now added to the chorus of appellate cases addressing what constitutes the "use" of a "computer," and what will be considered a loss flowing "directly" from such use. More particularly, the decision also provides some insight as to how the Eleventh Circuit may rule in a similar case now pending before it that does involve coverage for loss arising from a social engineering scheme under a similar computer fraud provision, captioned Principle Solutions Group, LLC v. Ironshore Indem., Inc., No. 1:15-CV-4130-RWS (N.D. Ga. Aug. 30, 2016). Stay tuned.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

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