Misappropriation of Funds Exclusion Precludes Coverage for Accounting Firm’s Erroneous Transfer of Client Funds to Third-Party Fraudsters

A federal district court in Connecticut has granted an insurer’s motion to dismiss a breach of contract claim by an accounting firm, holding that the firm’s professional liability policy’s exclusion for theft, misappropriation, commingling, or conversion of funds precluded coverage for a claim against the insured for completing fraudulently requested transfers of funds.  Accounting Resources, Inc. v. Hiscox, Inc., 2016 WL 5844465 (D. Conn. Sept. 30, 2016).  The court rejected the insured’s argument that the exclusion applied only to misappropriation or conversion by the insured or its employees.

The insured accounting firm provided bookkeeping and accounting services for a client, including paying the client’s vendors on its behalf.  A third party compromised the client’s email server and sent fraudulent email requests for vendor payments to the insured.  The insured completed the transactions, wiring more than $500,000 to bank accounts presumably controlled by the third party.  After the loss was discovered, the client blamed the insured, and the insured sought coverage under its professional liability policy.  The insurer denied coverage based on a policy exclusion barring coverage for “any damages or claim expenses, for any claim . . . based upon or arising out of the actual or alleged theft, misappropriation, commingling, or conversion of any funds, monies, assets, or property.”  The insured then filed an action against the insurer for breach of contract.

The court held that the exclusion was unambiguous and precluded coverage for the claim.  The insured argued that the exclusion barred coverage only for theft, misappropriation, commingling, or conversion of funds by the accounting firm or its employees, and not for the negligence of the insured in contributing to or failing to prevent those acts by others.  The court concluded, however, that the exclusion contained no limitation regarding who must engage in the theft, misappropriation, commingling, or conversion and, as a result, the exclusion applied regardless of who engaged in those acts.  According to the court, the fact that other exclusions (e.g., the intentional acts exclusion) did specify to whose acts the exclusion applied supported its conclusion, because the parties plausibly could have drafted a similar limitation on the theft of funds exclusion.  The court also noted that the exclusion’s lead-in language, which included “arising out of,” contemplated even an indirect causal connection, which would include wrongful conduct by third parties that goes undetected and unexposed by the insured.  The court therefore granted the insurer’s motion to dismiss.