View this article online: https://www.insurancejournal.com/news/national/2021/03/01/603190.htm
Real estate software maker RealPage has been denied a $6 million computer crime insurance coverage claim because the stolen funds were not in its possession but were instead being held by a payment processing firm at the time of a phishing scheme.
National Union Fire Insurance Co. (a unit of American International Group-AIG) and Beazley Insurance Co., insurers for RealPage, won dismissal of all claims against them in an opinion by Judge Jane J. Boyle of the U.S. District Court in Dallas.
RealPage provides services for property managers in the real estate industry. Its services include collecting payments from tenants and then transferring these payments to its clients. RealPage contracted with third party Stripe for payment processing and related functions.
Upon receiving notification from RealPage, Stripe would direct its bank, Wells Fargo, to process a transfer that would pull money from a tenant’s bank account and place the funds in Stripe’s Wells Fargo bank account, where they become commingled with funds from other Stripe accounts. Thereafter, Stripe would direct Wells Fargo to complete another transfer to pay these funds to RealPage in accordance with RealPage’s instructions.
RealPage has no access to the Stripe bank account and, according to their contracts, Stripe serves as an independent contractor, except one of the contracts states that Stripe is RealPage’s agent for holding funds that are ultimately owed to RealPage.
In May 2018, bad actors used a targeted phishing scheme to alter the account credentials of a RealPage employee. They then used those credentials to alter RealPage’s fund-disbursement instructions to Stripe. The criminals were able to divert more than $10,000,000 that had not yet been disbursed to RealPage’s clients
Upon discovering the fraud, RealPage directed Stripe to reverse the payments and freeze any ongoing transfer. RealPage ultimately recovered a portion of the lost funds, but it was unable to recover more than $6,000,000. RealPage reimbursed its clients for the lost funds.
RealPage had a commercial crime policy from National Union, effective through March 31, 2019, that provided $5,000,000 in coverage for specified losses. RealPage also obtained an excess fidelity and crime policy from Beazley for the same policy period that provided a $5,000,000 limit of liability. The parties agreed that whether RealPage is entitled to coverage under the Beazley excess policy depends on whether RealPage is entitled to coverage under the National Union policy.
The National Union policy has an ownership provision whereby the property covered is limited to property owned or leased by RealPage or property it is holding for others whether or not it is legally liable for the loss of such property.
National Union’s policy also has two insuring agreements. One is a “Computer Fraud” insuring agreement, which states that the insurer will pay for loss of or 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” to a person (other than a messenger) or place outside those premises.
The other relevant insuring agreement, titled “Funds Transfer Fraud,” states that the insurer will pay for loss of funds resulting directly from a fraudulent instruction directing a financial institution to transfer, pay or deliver funds from the insured’s “transfer account.”
Following the phishing scheme, RealPage filed a proof of loss with National Union, seeking coverage under the policy for $6,022,021.
In response, National Union concluded that under the computer fraud insuring agreement, RealPage was entitled to coverage for the portion of the loss of funds that represented transactional fees owed to RealPage “since it owned those funds.”
With respect to diverted funds that were owed to RealPage’s clients, however, National Union concluded that RealPage “did not own or hold” the funds and thus was not entitled to coverage.
The parties had agreed that RealPage did not own or lease the funds. Thus Judge Boyle examined whether RealPage suffered a loss of property covered by the policy by determining whether RealPage “held” the client funds.
“There are numerous dictionary definitions of “hold” with one unifying characteristic: possession,” the judge noted.
The court found that the plain meaning of the term “hold,” as used in the policy, includes possession and that an ability to direct property, without more, is insufficient.
The court agreed with RealPage’s argument that the policy intends for “own” and “hold” to have different meanings but ruled that “own” encompasses a situation in which the insured “rightfully” possesses property, such as by “legal title” and that with ownership, the property belongs to the insured. On the other hand, “hold” applies when the insured cannot claim that the property belongs to it—rather, the insured possesses the property owned by another.
The court found that funds that are “maintained in a commingled account in a third party’s name, at a third-party bank, which the insured can direct but not access, are not funds ‘held’ by the insured.”
The court recognized that RealPage might have intended to “hold” the client’s funds and further acknowledged that the bad actors utilized RealPage credentials to obtain the funds. Nevertheless, the court concluded that based on the plain language, RealPage did not hold the funds.
Since it did not own or hold the funds, RealPage did not suffer a direct loss as required under the policy, the court concluded.
“Here, since RealPage did not hold the funds, its loss resulted from its decision to reimburse its clients. Accordingly, RealPage did not suffer a direct loss as required under the policy,” Judge Boyle wrote.
“RealPage could have contracted for a broader definition of covered property. But it did not,” the judge added.
The case is RealPage Inc. v National Union Fire Insurance Co.