While it may seem counter-intuitive, wire fraud induced by email does not constitute a loss directly caused by the use of a computer, and for good reason.

The Eastern District of Michigan recently encountered this scenario in American Tooling Center, Inc. v. Travelers Casualty and Surety Co. of America.  The insured received what appeared to be an email requesting payment from a vendor.  To accomplish the ruse, the impostor artfully changed an “m” in the domain name of the vendor with “rn,” and further responded to requests for proof of milestones made by the insured.  After receiving such proof, the insured wired payment to the designated bank only to realize later it had been duped.

The insured submitted a claim for computer fraud to Travelers Casualty and Surety Company of America. The Travelers Policy covered “computer crime,” defined as any “direct loss of, or direct loss from damage to, Money, Securities and Other Property directly caused by Computer Fraud.”  The Travelers Policy further defined “Computer Fraud” as, in pertinent part, “[t]he use of any computer to fraudulently cause a transfer of Money….”

The Court held the email scam did not constitute a loss directly arising from the use of a computer. Instead, the Court observed the insured responded to the fraudulent emails by taking verification steps prior to authorizing the transfer of funds.  As a result, and unlike a hacking case, the transfer itself did not directly arise from the use of a computer.  In so holding, the Court emphasized “direct” in this context meant “immediate.”

Though the email was part of the scheme, the email was 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 fraud.”

Coverage often turns on a strict interpretation of causation, and it is no different when the means or mode of loss is through the internet. While an email may start the causal chain of loss, intervening acts can disrupt the chain of causation for coverage purposes.

Thanks to Chris Soverow for his contribution to this post.